Does the phrase “Can’t see the forest for the trees” ring a bell with your customer acquisition strategy?
Are you feverishly blasting through your marketing budget trying to fill your lead funnel with whatever you can get, without really knowing who you’re targeting and why?
Sometimes marketers find themselves performing Random Acts of Marketing (RAMs) that are focused on the here and now without planning a long-term acquisition strategy.
The process of formulating your overarching marketing strategy before deploying marketing tactics is an important and often overlooked concept.
And there’s a frequently-forgotten metric that’s fundamental to this concept: Customer Lifetime Value (CLV).
Customers are the heart of your business. Don’t forget to consider their lifetime value.
What is CLV?
CLV is the dollar value of your customers over the lifetime of their relationship with your brand. It can be calculated with the help of 4 sub-metrics that I call ‘Brand Lover Indicators’ –
- Average Order Value (AOV)
- Purchase Frequency (PF)
- Customer Value (CV)
- Customer Average Lifespan (CAL)
Let’s break it down:
Average Order Value (calculate over 1 year period)
The average value of a purchase – Total Revenue / Number of Orders
Purchase Frequency (calculate over 1 year period)
How often a purchase is made – Number of Orders / Unique Customers
Customer Value (calculate over 1 year period)
The dollar value of a customer – Average Order Value * Purchase Frequency
Customer Average Lifespan
The period of time after which a customer is likely to stop doing business with you for good. Sounds depressing but it’s a real number! It could be 1 year, 3 years, 20 years, etc. and depends on your unique business model.
Armed with these 4 metrics, you can calculate CLV:
CLV = Customer Value * Customer Average Lifespan
Simple! Of course, there are more complex formulas out there that include metrics such as recency, net margin, discount rate, retention rate and indirect value of the customer based on their rate of referral.
Here’s a one from Wikipedia:
Customer Lifetime Value ($) = Margin ($) * (Retention Rate (%) ÷ ([1 + Discount Rate (%)] – Retention Rate (%))
Mind-boggling, right?! Depending on your business model, a complex formula like this may be necessary to get an accurate CLV. However, our simple formula is a good start and a solid foundation for most business cases.
Why is CLV such an important metric?
It takes the guesswork out of who your most valuable customers are. By understanding your CLV, you uncover what your customers are worth to you, not just today, but over the full length of time that they do business with you. It’s a liberating metric that enables you to engage in “Lifecycle Marketing” and building brand equity.
Think of it as an investment in the health of the most important organ of your business – your customers. To take that analogy further, just like the most important organ in your body, your heart, you need to keep your target customers happy (healthy heart) so that they keep coming back to do business with you (keep heart pumping).
You can then formulate a long-term strategy based on how much you’re willing to spend on acquiring and retaining customers. This can be likened to a diet and exercise program that you follow to stay heart-healthy.
CLV and segmentation
Not all customers are created equal! Marketing 101 teaches us that we should focus on the buyer types that are worth the most to us and not try and be everything to everyone.
In the words of Seth Godin, “Everyone is not your customer”. There are some customers that are better than others.
It’s best to calculate CLV for a range of customer segments to get a clearer picture of how valuable distinct customer types are to your business. Segmentation can be done using various criteria – age, gender, household income, marital status, zip code, personas etc.
The customer segments with the highest CLV are the ones you should devote your marketing efforts to. These same segments are the ones that are making purchases at a higher frequency and/or ticket price. They represent your brand lovers. Let’s give our brand lovers some extra TLC!
Why is CLV often forgotten?
More than 50% of the companies say they don’t know their CLV. Since some companies are still running in silos with disconnected data points spread across various parts of their organization, gathering the data needed to calculate CLV can sometimes be problematic.
Other reasons that CLV may not get the attention it deserves are lack of buy-in from the C-Suite, short-termism or not enough available data.
If you have a robust, well-integrated customer database with clean data, you shouldn’t have any issues calculating the Customer Average Lifespan and thus the CLV.
Keep working it!
Once you figure out your CLV, don’t be tempted to rest on your laurels and accept it as the status quo. The goal is to increase it through innovation by providing a better customer experience, incentives for repeat and referral business and building a more loyal customer base of brand lovers.
If you can find ways to increase the ‘Brand Lover Indicators’ – AOV, PF, CV – your CLV is going to go up! Remember your diet and exercise program for a healthy heart? The goal is to strive to improve your current state of health, setting goals along the way.
Never give up on a good thing (as George Benson once said)
A study by Bain & Co. shows that it costs 6 to 7 times more to acquire a new customer than to keep an existing one.
Acquiring new customers is expensive. Keeping existing ones and increasing their value over time is more cost-effective. Don’t give up on them!
Iconic brands such as Zappos, Starbucks, Netflix, and Amazon are all ‘staying healthy’ by using CLV to their advantage. You should too!