How to calculate Customer Lifetime Value
Calculating Customer Lifetime Value
Customer Lifetime Value (CLV or LTV) has a number of different definitions and approaches, so sitting down to calculate customer lifetime for your business can be daunting.
And that’s a real shame.
So we sat down to address how we calculate customer lifetime value to help improve data driven marketing for our users, we kept things simple.
The reason being that we wanted to provide something that could be universally applied and built upon.
We also wanted to create a metric for customer lifetime that doesn’t need an in-house rocket scientist to explain to the marketing team.
You see once you understand the power of customer lifetime value as a metric, the way you plan and measure your future marketing change – and for the better.
What can you do with Customer Lifetime Value?
It’s universally agreed that Customer Lifetime Value is the single most important metric for understanding your customers.
CLV gives you an individual sales report for each individual or business that you deal with.
Having this metric to hand, helps you and the people around you make key business decisions on sales, marketing, product development, and customer support.
Marketing: Where are my best customers coming from, and how much should I be spending to acquire a customer?
Product Development: What are my best customers buying? How can I tailor or offer products and services around their needs?
Customer Support: How much should I spend to service and retain a customer?
Sales: Are you focusing your sales efforts on the types of customers that are spending the most money with you? You should be.
How do you calculate Customer Lifetime Value?
How you calculate customer lifetime value depends on the complexity of your business, and that often acts as a huge barrier to getting started.
Some consider the most straightforward way to calculate customer lifetime value is to take the revenue you earn from a customer and subtract out the money spent on acquiring and serving them.
But that in itself can be a daunting task, especially for an ecommerce business with a complex and ever changing cost per acquisition metric. See this post on cohort analysis from our friends at Bearded Colonel
We keep CLV simple and generic.
When we calculate customer lifetime value, it’s as simple as the total spend of each individual customer over their lifetime, divided by the number of customers.
Estimate your Customer Lifetime Value
If you are using Websand, we already collate the spend information for each customer, so your Customer Lifetime Value metric is front and centre of your dashboard.
We’ve found the in majority of cases, having customer lifetime value as a real-life metric can be a real eye opener and gives you a great indication whether things are working or not.
If you want to take this baseline figure and take it deeper, then we can help too.
Improve your Customer Lifetime Value
Even a small increase in your Customer Lifetime Value can have a dramatic impact throughout your business.
And the easiest way to improve this metric is apply different strategies to different customer groups based on their ‘value’ to your business.
To help apply this, Websand has a built-in customer lifetime value ‘matrix’ (see below).
Again this is front and centre of the dashboard, and updated in real time based on the activity of your customers.
If customers are active and above your average customer lifetime value, then we consider them your VIP’s.
These are customers that are active and spend a lot of money with you. You want to keep these people happy and retained. Perhaps benefits, perhaps special deals, whatever works best for your business.
If customers were active and above your average customer lifetime value, then we consider these your lapsed customers.
They’ve spend considerable money with you in the past. So it would be reasonable to invest in them and re-awaken them as customers.
These are customers that have recently purchased, but below your average customer lifetime value.
These are most likely to be new customers. So focus here could be to move them to the next purchase. Make these customers your future VIP’s.
Customers that haven’t spent for a while and didn’t spend much anyway.
Usually these customer would be audience targeted for customer churn marketing. However, now we understand our customer lifetime value, and this group hasn’t really demonstrated much.
So rather than be a group to target specifically, the inactive customers could be a group to include in ‘normal’ marketing.
However, understanding the profile of the inactive customers could be extremely valuable. It could be that your best performing sources of customer acquisition are actually producing low value customers.
Unlock the secrets of customer lifetime value within your business
Websand is based on a history of loyalty marketing. Where understanding customer lifetime value is a key metric of understanding and driving business performance.
We think the customer lifetime value metric is so important we’ve pretty much built our marketing automation platform around it. And our customers agree.
To unlock the benefits of data driven marketing and calculate customer lifetime value for your business, get in touch.
Also published on Medium.