A recent survey of marketing professionals revealed that only 48% of companies measure customer lifetime value (CLV) aka LTV.
How to Calculate Customer Lifetime Value
Perhaps this is due to a focus on short term revenue metrics in order to please private equity overlords, or maybe there is not a mechanism to capture the value of a customer. Either way, this statistic does not gel with the goal to be more customer focused that many companies are aiming for.
Customer Lifetime Value is more than just a key metric to determine the return on investment (ROI) of marketing spend. For many companies this is a North Star Metric – as LTV is a function of many different variables.
And, in a world where XaaS (Everything as a Service) is the business model of choice, the lifetime value of a customer is even more relevant. Monthly subscriptions might limit the number of levers that can be adjusted. Recency and frequency are just two of the variables that are rendered irrelevant with this kind of pricing model.
It’s not like CLV is a new concept. Banks realised a long time ago that creating products for kids would lead to more lucrative products like credit cards and mortgages being bought because of high switching costs and inertia.
Lifetime Value and Marketing
How can the 52% of companies that don’t measure CLV determine their marketing budgets? How can you tell if your cost of acquisition is too high if you don’t know if you are making money from the customer in the long term?
And how can you manipulate your marketing campaigns so that you spend more money getting ‘better’ customers if you don’t know how much a good customer spends in a lifetime versus an average or bad customer?
How do you know if your brand has any value if you don’t measure the lifetime of a customer? Is your product so commodified that customers have no loyalty and switch based purely on price? If your customers are only buying from you once, then you have a deeper problem.
Calculating CLV to inform your marketing team might be something that you assign to your Chief Marketing Technology Officer (CMTO)
Lifetime Value and Ecommerce
Traditionally, LTV has been calculated using averages. But in a time of Digital Transformation and Omnichannel data collection, customer lifetime value can be measured for individuals. Because not all customers are equal.
One of the best arguments for ecommerce, as if it needed to be justified, is that orders through a digital channel can be tied to a specific customer. All of those RFM measures like recency and frequency and order value don’t have to be averaged.
High value or VIP customers can be identified more easily and retention mechanisms can be tailored and automated using AI and lifetime value predictions for a certain type of customer or customer group.
Integrating your Ecommerce Platform like Shopify or BigCommerce with your Customer Relationship Management (CRM) and making LTV an OKR can be very powerful.
Customer Lifetime Value and Loyalty
Lifetime Value is also key to the calculations involved in Loyalty programs. In fact, LTV is the ultimate KPI to measure loyalty. The whole concept of a loyalty program is to maximise the lifetime value of a customer.
This is especially true for a XaaS model where you bill your customer in a subscription fashion. You can’t really change the recency or the frequency or the order value, but you can change the lifetime of the customer.
Understanding the numbers that make up LTV also allows you to create loyalty tiers that reward profitable customers differently to customers that might cost you money.
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