Which half of customers are killing your business? You’ll know the answer once your customer lifetime value is understood. Customer lifetime value, better known as CLV in marking jive, is one of the top metrics your business should understand, and a key driver in the strategy decisions you make.
This customer metric provides you the understanding of what value you should place on each of your customers over time. It places the lens on meaningful insights on where and how you should conduct your digital (and integrated) marketing strategies.
If your start-up is still smelling like baby powder as you just launched, or you’ve pivoted your product a few times and finally achieved adoption and on the path towards growth, you should already be thinking how to measure CLV.
Make it your goal to build a sustainable business for the long haul vs. short-term gains, unless of course you’re aiming for trajectory growth and revenue for inflated valuation to make a quick exit. But even in that case your investors or buyers will be, or should be, looking to see how sustainable is your business. Your CLV will guide your strategic decisions to reach that long haul by surfacing the most valuable customers who bring the benjamin’s to the table (and the low-value customers who could be killing your business).
The topic of CLV tends to first come up in marketing conversations when the spotlight is put on retention. And retention becomes the hot rookie more times than most when the product or business is arching towards its plateau (and by then its probably be too late).
Customer lifecycle value aligns with customer retention as it’s the heartbeat on how healthy your business is long term. The key takeaway is how much do you invest into retaining each valuable customer, or nurture mid-tier customers into valuable customers, or how to avoid spending the dollars on those who provide little value to your books. I mean, look no further than Vegas to see how they invest into their most valuable whales. They know your value you bring them, and they personally tailor the right mix to keep you coming back for more.
You cannot get to that point nor make any intelligent decisions without first calculating your CLV and retention rates.
Calculating and analyzing these two KPI’s, you can place a decent value on each customer and begin to categorize them into customer segments that each have different meaning to your business. You’ll seek to identify how each should be treated, and whether or not if you should even continue trying to keep them. Even customer churn is not a bad thingâ€¦as long as it’s those customers that bring little to no-value that drive your costs.
These metrics alone will also help you make those budget decisions on where and how to invest on finding, winning and keeping new customers that portray the similar behaviours as your customer segments.
How to calculate your CLV
There are a few different ways you can measure CLV and retention….some extremely complex, while others just keep it simple.
I’m a believer that simplicity is the art of sophistication, so I prefer to get the get the general picture before finding the hot spots to drill in for deeper analysis and understanding versus over-complicating the situation.
But an important caveat you should understand is that you’re ranking customers on the basis of revenue or profits they’ve contributed to your business.
Obviously this is important, but don’t neglect those who may portray the traits of a high value customer, and on the cusp of their revenue contribution to join the high-value club. Or any customers who are low to mid-level, but are strong advocates and influencers to drive referrals which is a separate KPI to understand. They may not bring the dollars directly, but they may be your best ally and advocate to assist in reaching your high-value guys. For example, in your digital strategy, think of your affiliates performance and who drive referral quality vs. quantity, and the converting referrals and revenues earned.
There are a few inputs into any CLV formula you’ll first want to know. But remember, as there are a number of ways to calculate CLV, the following points are among the most common ingredients to your CLV pie.
- How long is your customer relationship? Meaning what is the lifespan of your customers?
- What is your profit margins, and average spend per purchase?
- How many purchases are made per year, and the estimated revenue?
And as I write this and think of the different ways I’ve seen CLV calculated, I’m staring at my Starbucks (an Americano with white mocha) and thinking here’s a brand that gets it!
Starbucks retention efforts are solid. They treat me in the special way I deserve (and damn well better considering the portion of paycheque I spend with them). So let’s look at Starbucks method of calculating what my value is to them (Starbucks employes 3 approaches).
1. Simple Customer Lifetime Value
Formula: 52 X average customer value per week X average customer lifespan
Inputs: Average customer value per week = expenditures X visits
2. Customized CLV Equation
Formula: Average customer lifespan X (52 X average customer expenditures per visit X number of visits per week X profit margin per customer)
3. Traditional CLV Equation
Formula: Average gross margin per customer lifespan X (customer retention rate / 1 + rate of discount customer retention rate)
Each approach to understanding CLV will provide you three different amounts. So to get to just one solid figure to give you guidance, just average all three.
It sounds simple but CLV calculations can, and may, vary among organizations. There is no one perfect way to perform this, just as there is never just one path to reach a goal, but the results can be the same if not similar.
But if you prefer a more sophisticated way to refine the CLV numbers, try the Harvard Business School customer lifetime value calculator.
Alternatively, if your organization has a Business Intelligent team (BI), they should be (or they better have been) thinking how to extract the data from the warehouse to model and deliver a CLV, and provide your Â leadership team they necessary information for more actionable insights about your business and customers.
If you attain this, how do you share the insight through cross-function teams, including delivery to your high-touch points of customer contact (ex. website, client services, sales teams, etc.).
I’ve got my CLV and retention rates, now what?
Deer in headlights moment, right? The simple answer is to just make sense of the numbers and take action.
Start with grouping or segmenting customers based on their business value and mapping all the various touch-points you do (and don’t do) today.
For example, you may be surprised to find your churn rates are high because you’re barraging and pissing off your high-value customers with too much email from various teams who all have something to say. All this digital noise can hurt business, and its even more critical for digital and ecommerce businesses as the email address should be considered as gold.
The CLV approach I prefer the majority of the time is the segmentation and application of a RFM model to each group.
RFM if you’re not familiar with it is a way of modeling customer buckets or segments by looking at their activity and behaviours around Recency, Frequency and Money value. For example, if you’ve defined your high-value customer, then how do they look when you evaluate the recency in which they’ve conducted business (yesterday or 6 months ago). How frequent do they conduct business with you – daily, monthly, once a year? And then how much money are they parting away with into your coffers? Do they spend $1,200 once a year, or $100 every month?
As a next step, look at all the various ways your business engages or touches each segment.
I’ve been surprised to find at times how some brands send over 15 emails per month to the highest value customers. If you consider an email address as gold (and it may be the lock and key to them doing business with you), then a value should be assigned to touching that customer if each team or channel in your organization shares that customer in their campaigns.
For example if your marketing and metrics are truly integrated, then the campaign launched from your product department in Toronto should be visible in your CRM to your Client Services in North Dakota. Not only does it give a timely talking point for Client Services when the lead or customer phones in, but it also allows to flag if the lead or customer is not interested (thus don’t hit them with a follow up email) or opportunity to harvest additional information that may trigger a cross-sell or up-sell opportunity from your product team in Vancouver. Alternatively 1/2 of your top 10 customers may even not want to hear from you and gets the high-touch treatment from an account manager. There are countless scenarios here, but the point is that most companies have little to no grip on how many times a customer, let alone a high-value customer, is being touched and its impact on them continuing to do business with you.
But back to your new customer segments….once your customers are grouped and you have an understanding, and better yet you have control over all the touch points, only then should you determine how best to engage them.To understand this you’ll seek to know more about them beyond just their purchasing activity.
Perhaps you can cross-profile them with other product channels, or your CRM or as some brands who get it nowadays, connect their CRM and customer accounts with the primary social media platforms customers user to extrapolate and cross-pollinate your customer accounts with personalized demographic and psychographic information that is all sitting available in the vast social media ecosystem about your customer.
Does your top-tier customers enjoy yoga, in what city or suburb do they live, how old are they, do they have a close circle of friends who resemble a similar profile, is their anniversary approaching, kids, hobbies, etc.
Building an enhanced profile around your customer segments can then provide the octane for your customer retention programs to deliver meaningful impact with your various customer segments and ultimate retain the high value guys and cultivate the mid-tier guys to join the high value club.
Understanding this will open up a ton of great questions you’ve likely often sought answers too, such as what behaviours does each segment exhibit on our website, does a particular piece of content or tool attract high value or low value customers, are there assist channels that provide strong lift to a last touch channel of a high value customer, where can get the most lift and return on my annual marketing spends, and in which channels and ROI did I get from them….or overall lift by channel and effort, etc. etc.
50% of your high-value customers hate your offer
Well, maybe not half but your key customer segments may not want to hear from you, or feel you deliver noise and agitate them…which may be why the left or not purchasing at the frequency or recency you desire.
How do you know? Define your CLV and test, learn, optimize.
Test and track each effort you do with each segment and have framework to measure what impact (both good and bad, and online and offline) your new personalized highly-segmented campaigns have with the customers. Understand its impact on not just your goals and lift in revenue, but also how it moved the gauge of the customers overall behavior and their even their customer value.
This approach applies not just with retention, but any investment made into understanding and growing each customer segment.
And like many aspects of digital marketing, you cannot lift CLV or grow lucrative customer buckets until you test, learn, optimize and repeat.
Like this topic or hate it? Post your comments below and share with others how you’re calculating CLV in your business, how’s it used and what results you see from it. Drop me a line below.