An easy-to-follow guide for marketers on how-to calculate customer lifetime value (CLV), implement strategies, & maximize from the benefits.
Customer Lifetime Value (CLV) can be a game-changing concept that helps businesses modify their customer acquisition strategy before spending money on new marketing initiatives. CLV represents the total amount of money a customer will spend during the entire duration of being your customer. This includes factoring in months or even years’ worth of purchasing.
Creating a benchmark for CLV is important to develop before implementing ad campaigns, as it can help set a target Customer Acquisition Cost (CAC) and provides an idea of the full campaign cost. For example, when running a Facebook campaign for a product that costs $100, it may be disappointing if the CAC is $110. At face value, money is lost. However, when calculating the CLV on average for customers across one year it reaches $410, which then produces the true return on ad spend as 4x. Calculating the CLV provides the answer for keeping a campaign running, as it can prove to be very profitable.
A survey collected by Criteo reported, only 34% of marketers were completely aware of the term Customer Lifetime Value and its connotations. In addition, only 24% of respondents felt their company was monitoring CLV effectively.
How To Calculate CLV?
Answers will vary depending on the type of company. For example, this calculation will be easier for an established business in comparison to a startup, which may not present enough data. Follow these steps to understand CLV.
- Understand what the Average Order Value (AOV) is for each of these segments and the repurchase rate for each. For services like subscriptions, you have a definitive time for repurchase such as every thirty days. For instance, a meal prep business may charge $100/month which would then equal $1,200/year. For products that are more ambiguous, you will want to calculate the average amount of days between each purchase and multiply this by their AOV. If you’re using an eCommerce program such as Shopify, go to the Customers tab and export all customers and their lifetime spending as a CSV.
- Track the acquisition costs of customers across different advertising channels, this will be very important when calculating CLV for each segment.
- An easy breakdown of CLV is Customer Revenue Per Year multiplied by Years as customer, minus the total cost of acquiring and serving customers. This can be seen as:
- Customer Revenue: $1,000 Year (x)
- Years as Customer: 5 years (-)
- Customer Acquisition Cost & Serve: $100 ($500 over 5 years)
- CLV = $4,500
Maximizing Customer Lifetime Value
Once you calculate lifetime value, it’s time to maximize it by implementing retention strategies. Here’s an overview of building out an LTV strategy.
- Segment your customers by the amount they spend. Four tiers are recommended, Platinum, Gold, Silver, and Bronze. Each tier can represent 25% of your customers, with Platinum presenting the top 25% of customers who spent the most money. Breaking out the customers into tiers will allow customized promotional messaging to each tier.
- Once customers are segmented into tiers, the goal is to move them into the tier above the one they are currently in, this will help raise the CLV and ultimately help increase company revenue. Keep in mind, current customers are always easier to sell to then cold customers who have never purchased.
- Since the average rate at which customers purchase at each segment level is calculated, now this information can be used to create time-based advertising promotions. For example, with emails that deliver specific offers or promotions to these customers, prompting them to purchase again. Email marketing is critical in helping to raise CLV, as marketing automation programs like Klayvio or Omnisend can be utilized to automate this process after the initial promotion is created.
- Besides email marketing, programs like Google Optimize can help personalize the website experience for each user based on CLV or other predefined attributes. Optimize can be used to test new promotions and see which ones lead to higher conversion rates.
Dean DeCarlo is the President and Founder of Mission Disrupt, an industry-leading digital marketing agency providing services in digital strategy, paid media management, and user experience design. DeCarlo founded Mission Disrupt in 2015 with the goal of helping companies leverage digital channels to form deep relationships with their customers. Mission Disrupt is dedicated to assisting mid to large-sized companies captivate users with dynamic experiences, digital advertising, and creative design. Linkedin: https://linkedin.com/in/dean-decarlo/