A brief intro to CLV
Customer lifetime value (CLV) is one of the most misunderstood or ignored concepts in marketing, but understanding it will up-level your craft & give you a seat at the strategy table
There’s no single perfect metric for understanding a user’s economic value (and so also likely satisfaction) to a brand, but the one that comes closest is customer lifetime value (CLV). This is arguably more critical than things like CPA, bounce rate, site conversion, NPS (fuzzy) etc - those of course matter too and should be worked on but are ultimately more tactical. If you’re new to the concept, CLV is the present value of the future cash flows attributed to the customer during their entire relationship with the company.
The simplest formula for measuring CLV is avg customer order total multiplied by average # of purchases/year multiplied by avg retention time in years. This provides a baseline of the average lifetime value of a customer based on existing data. Your analytics package or CRM system may be able to help you do this in a way that is directly actionable and provide easy reports for analysis and optimization work.
It seems simple enough, but CLV is still one of the most misunderstood or ignored concepts in marketing because it’s inherently a long view, and our industry has suffered from shorter and shorter term tactical thinking as we rush from campaign to campaign. To adopt CLV is ultimately to take a more strategic method of measurement because it’s considering the future, not simply tracking results of the past. Understanding CLV will change your thinking on where it’s worth it to invest in acquiring new users, by measuring the value of existing, and where/how you acquired them. Of course you want to keep (most of) your old customers – no one wants to lose customers – but understanding which are the most valuable is what’s truly important, not just in keeping loyal customers, but finding more like them.
Businesses small and large benefit from measuring customer lifetime value, and yet in both cases we come across examples where CLV is not considered. Peter Shankman illustrates a situation where ignoring CLV can be costly in “Would You Lose a Customer Over Seven Cents?”. It’s an anecdotal piece about the author’s experience with a deli that he visits frequently for lunch, where once, he was short seven cents. The restaurant was inflexible on an insignificant cost which succeeded in doing nothing but frustrating Peter. They were thinking about the importance of following policy rather than the happiness of someone valuable to them. It’s easy to fall into that line of thinking because it’s typically part of a process, but if the person serving Peter was trained to understand the lifetime value of special (and - all customers are special!) customers and was empowered to break policies for them where it makes sense, the server would have clearly let the seven cents slide.
Peter then shared his experience on his blog (he was nice and protected the name of the restaurant – most people would not), proving that not only is valuing your customers important to increasing long term growth, it can also generate PR/organic word of mouth for you. Whether that’s positive or negative is up to businesses, but I can guarantee the ones that understand and value CLV (Amazon, for example) are going to generate warm feelings and reactions from customers, and so of course inspire repeat business.
CLV also helps solve the question for your organization of what types of users will be the most valuable over a continuum as opposed to ones that purely spend money today. For example, a flash sale might generate value-oriented customers and revenue immediately, but few may ever make a purchase again. Some research even says this could hurt you. Instead of a flash sale, perhaps the right seasonal offer actually brings in repeat customers that aren’t purely interested in discounts.
In a world with greater and greater choice, finding the best customers, keeping them happy and understanding their value over time as best as possible is vital to success in the long term. Without measuring CLV, you aren’t really able to accomplish this.
This is an updated version of a post that I originally published on my ClickZ digital marketing column, and am re-sharing here as it’s still relevant today.
CLV is like teenage sex, often talked about but there's not much action.
My experience in public companies is that CFOs like the CLV concept but are influenced by the CEO's monomaniacal focus on quarterly results. As a result it's only the more enlightened CFOs who are willing to fund marketing to take a longer term view of the business by adopting CLV as a strategic metric/driver.
Thanks for the flashback to graduate school, where I spent many many hours calculating the present value of future cash flows at the corporate level, to come up with company valuations.