Marketing phrases can often be obscure in their meaning. They sound simple enough as a phrase, but those who hear them are frequently unsure of the logic that lies behind the linguistics. Lifetime value is a perfect example.
Important to B2B businesses, it is nonetheless commonly misunderstood, and as a result, the practice behind it overlooked. In our view, this is a mistake that you really can’t afford to make, for if you do, you fail to benefit from it.
Its meaning is actually a simple one: customer lifetime value (CLV) means nothing more complicated than the total worth of a client over the entirety of their relationship with you. We all have such a figure attachable to ourselves, whether it’s how much we’ve spent over the years on Amazon, or how much money we’ve handed over in Starbucks.
For your own business, the importance of CLV is incalculable, but suffice it to say that the higher it is, the healthier and more profitable your enterprise will be.
HOW TO CALCULATE CLV
Although we’ve probably convinced you of its importance through the few simple sentences above, we’ve perhaps left you with more questions than answers, foremost amongst these: ‘how do I calculate CLV?’
Thinking about it, it probably seems that such a calculation would be impossible to make, not only because the data necessary to compile it is lacking, but also because you can never really know when the final total needs to be tallied.
This is all true, but that doesn’t mean that you can’t get an estimate together, and this estimate is important. Why? Because of that old adage about it costing less to retain existing customers than to acquire new ones.
This is not logic pulled from empty air, but a proven reality: whereas your chances of selling to a prospective new customer hover between about five and 20 percent, the probability of you selling to an existing client is closer to 60 to 70 percent.
Hence why CLV is so important to monitor, and why we would always recommend having tools in place to enable you to do this. Where these exist, the actual formula you’ll need to utilise is an easy one: customer revenue minus the cost of acquisition and serving.
In short, working this out means no more than following these four straightforward steps:
#1: Identify moments where value is created
#2: Collate customer records to create a view of the individual’s journey.
#3: Calculate the profit at each point.
#4: Add these together over the customer’s business lifetime.
It is also possible to measure predicted rather than actual CLV, simply by doing the following:
#1: Identify moments where value is created.
#2: Identify what that value is a function of, and whether and why it varies from customer to segment.
#3: Identify the reasons the client moved from one moment to the next.
Such a formula is most useful in cases where purchases are multiple and frequent, and where data on past purchases can be easily accessed.
THE BENEFITS OF MEASURING CLV
Without creating CLV, it is impossible to imagine the benefits of it, and how it can be used in building a more productive business strategy. That’s why we’ve collated this information for you:
#1: The first benefit of CLV is that it can provide useful insights that can contribute to the creation of more effective future marketing campaigns and customer interactions.
#2: It can also help to clarify how you ought to divide your capital between the retention of existing customers and the acquisition of new ones.
#3: It can give you an invaluable insight into the health of your company moving forwards.
Could CLV prove useful to you?
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