Understand Your Customer Lifetime Value (CLV)

Customer Lifetime Value (or CLV for short) is one of the most important – and yet, one of the most often ignored – aspects of running a successful business.

CLV reflects the total value, in financial terms, of one particular customer during the course of your mutual business relationship, or the average amount of money they spend on one purchase, times the number of purchases per year, times the total number of years they stick with you as a customer. An even easier way of calculating it could also be by subtracting the total cost of retaining a customer from the total revenue they bring to the table.

However you choose to look at it, determining each individual consumer’s CLV can help you retarget your marketing efforts, retain your most valuable customer,s and save you heaps of money in the long run. Let’s take a closer look at the reasons why Customer Lifetime Value can be a valuable tool to retain your best customers and increase your overall profits.

One reason why CLV should take a place of pride in your business strategy is that it allows you to divide your customer base into separate segments. Too many businesses still devote their entire budget to mass marketing, targeting both valuable and non-valuable customers at the same time. The truth is, however, that most businesses rely on a minority within that customer base for the majority of their overall profit. Dividing your customers in separate groups based on their CLV level will allow you to determine who has the highest value. It is exactly those customers you should be targeting with your marketing projects and email campaigns. Once you stop focusing on consumers who hardly leave any margin for profit, you will be able to decrease your marketing costs and increase your overall sales.

Not only are those customers with a high CLV more valuable for your business, they are also much more attractive from a marketing point of view. Consumers who are already spending a lot of money buying your products or services will also be more easily tempted to spend more. By creating special offers for or upselling to your high-value customers, your chances of success are multiplied. On the other hand, promotional offers will do little or nothing to tempt those consumers who have shown little or no interest in your business in the first place.

Apart from mass marketing aimed at their existing customer base, many companies also make the fatal mistake of spending more time, effort and money on attracting new customers than on keeping existing ones. However, once your CLV calculations point out the extra money and savings to be made on certain customers, it can help your marketing experts realize where your real profit lies. Increasing your customer base is, of course, important, but should never be put ahead of the valuable customers you already have. And did you know that customer acquisition actually requires more time and money than customer retention? If you do the math, you will realign your focus in no time.

Bigger does not necessarily mean better, and this old adage should definitely be adhered to when it comes to marketing campaigns. By focusing on a small but crucial part of your customer base, you can help your business grow on every level.

How to calculate your CLV.