Customer Lifetime Value
What is Customer Lifetime Value?
When focusing on sales and marketing, it is very common for brands to focus most of their time and effort on acquiring new customers.
But in reality, customer acquisition is just one piece of the puzzle.
Retaining existing customers and nurturing their loyalty is equally, if not more, important. This is where the concept of Customer Lifetime Value (CLTV) comes in.
Customer Lifetime Value (CLTV) is a metric that estimates the total revenue a customer is expected to generate for your business throughout their entire relationship with your brand.
It takes into account not just a single purchase but the potential for repeat business, upsells, and referrals over a customer's lifetime.
Why is CLTV Important?
Understanding your CLTV offers valuable insights into the true worth of your customer base. Here's why it's important:
Customer acquisition cost comparison
One of the biggest benefits of tracking CLTV is that it allows you to compare customer acquisition costs with the potential long-term value of a customer.
This type of analysis will help you determine if your marketing and sales efforts are generating profitable customers or whether you are wasting time and effort on short-term, unprofitable customers.
Improved customer prioritisation
By understanding the lifetime value of different customer segments, you can prioritise your marketing and customer service efforts towards the most valuable customers.
Regardless of how big your team is, there will always be limitations on how far your marketing efforts can go, so ensuring they are as effective as possible is critical for maximising productivity.
Customer retention focus
CLTV emphasises the importance of retaining existing customers, as loyal customers tend to have a higher lifetime value.
I am a big believer that one-off customers help get your brand noticed, but it is repeat customers that ensure brands secure long-term, sustainable success.
Predictive analytics
CLTV is also a great tool for predictive analytics, allowing you to forecast future revenue based on customer behaviour and lifetime value.
Forecasting is essential for any business as it allows brands to get a rough idea of what the future looks like, and what action is needed to achieve or beat those projections.
Marketing budget allocation
And finally, knowing your CLTV helps you allocate your marketing budget more strategically, focusing on channels that acquire high-value customers.
As stated already, successful marketing teams are brilliant at maximizing their budget and workforce, and understanding your CLTV helps you do just that, with a much greater insight into where you should be spending your time and money.
How to Calculate CLTV
There are two main approaches to calculating CLTV:
The Basic CLTV Formula
This simplified formula multiplies the Average Customer Value (ACV) by the Average Customer Lifespan (ACLS).
CLTV = ACV x ACLS
Calculating ACV and ACLS
Average Customer Value (ACV): This represents the average revenue generated by a customer over a specific period (e.g., year). You can calculate it by dividing your total annual revenue by the number of customers.
Average Customer Lifespan (ACLS): This represents the average length of time (e.g., months, years) a customer remains your customer. Customer churn data or industry benchmarks can be used to estimate ACLS.