WHAT IS CUSTOMER LIFETIME VALUE
In marketing, customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or life-time value (LTV) is a prognostication of the net profit contributed to the whole future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques. It’s been called the most important metric for your business, and with good reason. It’s also one of the more underappreciated, perhaps because many brands struggle to properly define and calculate it.
But the longer you put off keeping track of CLTV, the longer it will take to understand which of your marketing campaigns drive customer loyalty and increase overall revenue. This means fewer strategic marketing campaigns, fewer empowered marketers on your team, and ultimately less revenue for your brand.
At a glance, CLTV tells you how much a customer is worth to your brand and gives you insight into their overall value. From there, you’ll have a better understanding of how much you should be investing in customer retention going forward.
Not only that, but customer lifetime value clues you into whether or not you can expect certain customers to become repeat customers. If their customer lifetime value is high, chances are they’re fans of your brand and will continue to buy more of your products. If not, they’re likely just a passive customer who made a one-time purchase and will take extra effort to re-engage.
HOW TO CALCULATE CUSTOMER LIFETIME VALUE
You don’t need to be a math whiz to figure out your brand’s customer lifetime value. With just your phone’s calculator and a few key numbers, you’ll have a crystal clear picture of where your customers’ lifetime value stands right now, along with what you need to improve that number in the future.
In its simplest form, you can calculate CLTV by taking your average order value, multiplying by your average customer’s purchase frequency, then dividing that number by your average customer lifespan.
Let’s say you’re a kitchenware online store that specializes in high-end cutlery. Right now, your average order value is $150, and your purchase frequency is twice every year. On top of that, your average customer lifetime is three years. Plugging in all of that information into the formula, your CLTV would be $100. Overall, that’s a pretty good number for a niche store that likely counts one-time purchases as a large part of its revenue.
Of course, there are variations on this formula depending on how in-depth you want to get. But at a high level, using this calculation will set you up for CLTV success.
Pro tip: Whatever your CLTV number ends up being, you want to keep it higher than your customer acquisition costs (CAC). That’s not to say you should primarily focus on your CAC. If you’re not thinking beyond your customer’s first purchase with your brand, you’re not optimizing for CLTV in ways that help your brand hold on to the customers who consistently engage with it.
Still need convincing that CLTV should be a go-to metric for your marketing team? Here are three points that will hopefully give you a more thorough context around its value.
1. It’s a faster path to additional revenue through retention
If you’re looking at customer lifetime value as a way to justify spending more on acquisition, you’re probably focusing on the wrong side of the equation. In actuality, the best way to maximize customer lifetime value is by investing in retention.
Think about it: For every 1% of shoppers who return to your ecommerce site after their first visit, your revenue increases by approximately 10%. So if you retain 10% more of your existing customers, your revenue effectively doubles.
Here’s another way of looking at it: Reducing your churn rate by 5% increases your profitability by anywhere from 25 to 125%. Oh, the wonders that investing in a CLTV-focused strategy can do!
2. It’s an easier way to incentivize repeat customers
Not only is driving CLTV a quicker way to increase revenue, but it’s also the easiest way to do it. Although ecommerce marketing may be a complex task, technology is making it exponentially more manageable and effective. If you’re using an Activated Customer Data Platform, you can see easily see how CLTV affects the bigger picture of your overall marketing efforts.
In ecommerce, the probability of selling to an existing customer is around 60-70%. Yet the probability of selling to a new shopper ranges from 5-20%. In addition, returning customers spend an average of 67% more than first-time customers. Knowing to focus on repeat customers—as well as getting one-time customers to make another purchase—clears the way for centering your marketing strategy on these segments in order to drive CLTV.
3. It’s a more profitable path to revenue and customer loyalty
Chances are you’ve heard of the Pareto Principle, which hypothesizes that 80% of your revenue comes from 20% of your customers. Not surprisingly, this focus on your most loyal customers makes a lot of sense for increasing your customer lifetime value.
When you calculate your brand’s CLTV, it’s easier to see and segment your highest-value customers, giving you a chance to target them with special campaigns intended to increase their loyalty—and their overall spend. And why wouldn’t you, when just a 5% increase in customer loyalty can increase your average profit per customer by 25-95%?
HOW TEA FORTE INCREASED THEIR CLTV BY 25%
What does it look like when a brand truly optimizes for CLTV? Here’s a great example.
Known for quality handcrafted teas with exquisite packaging, Tea Forte is the go-to luxury tea brand for casual and ardent tea drinkers alike. While they certainly have a strong, recognizable brand, Tea Forte lacked a consistent marketing strategy that catered directly to their highest-value customers’ needs.
By using an Activated Customer Data Platform to implement behaviorally driven campaigns with smarter segmentation, Tea Forte saw a 20X return on spend in just under a year. But more than that, they’ve seen a 25% increase in their customer lifetime value by pinpointing the right people to message at the right time.
This attentiveness to campaign messaging based on buyer personas helped the Tea Forte team gain a deeper understanding of their customer, order, and product data.
According to Jurgen Nebelung, Tea Forte’s VP of Ecommerce and Digital, the key to increasing the brand’s CLTV came down to taking a customer-centric view of marketing data rather than a campaign-centric one. “It’s important for us to understand the conversion and revenue impact of each touchpoint and put the customer, rather than that channel, first,” he said.
Now, Tea Forte incorporates behavioral campaigns into their entire email strategy, driving higher CLTV through post-purchase behavioral series that are personalized to each buyer.