Customer Lifetime Value
Few buzzwords in the marketing world can compete with the level of mystification that CLV creates. I’m here to help break it down for you, because this is an important part of business longevity. CLV, or customer lifetime value, is the total worth of a customer to a business over their entire relationship.
We’re talking years and years, people. This goes further than the relationship I had with the barista this morning for those few precious minutes I was ordering lattes for the Signet team. While those moments with the barista may not seem to add up to much, they are important in tabulating just how deep my relationship with Starbucks is – and how long I’ll keep that relationship.
The Give and Take of CLV
Sure I could clock every time I ask a Target sales associate what aisle the bulk candy is on, but that’s not going to do me or them any good. And since Target is my destination of choice every week anyway, I’m a lot more willing and likely to spend money there than at some similar store I have no relationship with. According to Marketing Metric, the probability of a business selling to a new prospective customer is five to 20 percent. That jumps to 60-70 percent for an existing customer. And that, in case you did not notice, is a huge jump.
If a lifetime customer is 60-70 percent likely to buy on any given shopping occasion, and you multiply that by the 5, 10 or 25 years they’re going to be your customer – the revenue from them will actually pay for the ad spend you need to attract new customers. The only trick here is to make sure your current customers keep coming back.
Remember my micro-relationship with the barista this morning? It matters because it’s one of dozens of positive, helpful experiences I’ve had with that company. Relationships are the key to long-term brand health (and they don’t all have to be in person). Despite this, many companies invest more time and dollars in chasing new customers than they invest in retaining their existing ones.
How to Calculate Lifetime Value of the Customer
You can break CLV measurement down to a fairly simple formula: customer revenue minus the cost to acquire and serve the customer. It’s the same for B2B and B2C. Measuring is the first step in understanding the benefits of CLV; without measurement you can’t see the benefits and you can’t add it into an existing strategy. With a clearly defined CLV, you can determine how big or small your customer retention budget should be compared to the acquisition budget.
You can retain an existing customer through one email send or one great in-store conversation – basically, there’s no big cost involved. Getting new customers requires what can be a long series of advertisements and trials & errors – basically, there’s a pretty penny involved.
Benefits of CLV
Of course, you need both old and new customers to carry your business into the future – but the direction of your marketing should always contain a hefty consideration for rewarding current customers.
Is your company built for quick wins, or is it built for sustained growth over the long haul? For helping finding ways your business can improve the value of your customers over time, you know who to talk to.