29 Jan Customer Lifetime Value
You can’t ignore your Customers’ Lifetime Value (CLV). This is the amount of profit a customer delivers to your company for as long as the customer is active and purchasing your goods or services. CLV estimates can help you determine the budget needed to acquire a new profitable customer. It also allows you to see the total profit that each of your customer segments represents to your company. With this data, you can keep your marketing strategies nimble and adjust them to focus on the most valuable segments, identify customers who are spending more or less than an average customer in the segment; and identify customers who are “at risk” of going away so you can develop alternate campaigns to retain their business.
The first step is to determine where and how to use CLV calculations in your marketing. When you know what a customer is worth to your company, you have an extremely powerful tool that helps you improve your acquisition, retention, targeting, profitability and ROI. To calculate CLV, you also need to understand your customer lifetime – the amount of time between the customer’s first and last purchase The CLV is the amount of profit the customer has provided to your company during their lifetime.
Once you’ve calculated your CLV segments, you can use this data to make sure that your marketing budget to acquire new customers is aligned with the lifetime value for that segment. If your budget is substantially lower than the lifetime value multiplied by estimated number of customers acquired, you could increase your spending and still remain profitable, allowing you to generate additional new business.
If your budget is higher than the lifetime value multiplied by estimated number of customers acquired, you are in the red and losing money, so you should adjust your marketing programs until you get back in the black.
CLV is a powerful data point, so don’t ignore it.