As marketers, it’s easy to become fixated on engagement metrics like impressions or click-through rates. While these are great for gauging your impact at the top of the funnel, it’s important to remember that the customer journey extends far beyond your LinkedIn ads or your blog posts.
To fully understand the impact of your marketing, you need to take a step back and look at what’s happening after those first engagements. That’s where Customer Lifetime Value (CLV) comes in. CLV helps marketers gain deeper insights into the actual worth of their customers, enabling them to refine their messaging and optimize strategies to capture and retain their most valuable customers.
This blog covers the fundamentals of CLV, including what it is, how to calculate it, and why it matters. We also delve into common pitfalls in tracking CLV and provide tips for best practices.
What is Customer lifetime value?
Customer Lifetime Value (CLV) is a metric that estimates the total revenue a business can reasonably expect from a single customer account throughout the business relationship. The length of this relationship can span from the customer's first purchase to their final interaction with the business.
CLV is a particularly important metric in understanding how much your business should invest in acquiring new customers and retaining existing ones based on the profit each customer is expected to generate over their lifetime.
CLV estimates the total revenue expected from a customer account throughout the business relationship.How is customer lifetime value calculated?
You can calculate your average CLV for a customer using the customer lifetime value formula, which requires three pieces of data: the average order value, the average purchase frequency, and the average customer lifetime.
Let’s take a closer look at what these three pieces of data entail:
1. Average order value
This refers to how much your average customer typically spends on one order and can be calculated by dividing the total revenue over a set timeframe by the total number of orders made within that same timeframe.
2. Average purchase frequency
This refers to how many purchases were made per customer over a set time period and can be calculated by dividing the total number of orders made by the total number of customers during the same time period.
3. Average customer lifetime
Average customer lifetime is an average of how long your customers stick around and can be calculated by dividing the average number of days between customers’ first and last orders by the total amount of customers.
The customer lifetime value formula
To calculate the average CLV, first multiply the average order value and the customer’s purchase frequency to get the customer value. Then, multiply this by the average customer lifespan to calculate the customer lifetime value.
Why should customer lifetime value matter to marketers?
When it comes to running a successful marketing campaign, focusing on surface-level metrics to track success can be a bit misleading. If you really want to understand the effectiveness of your marketing strategies, you need to dig deeper. Customer Lifetime Value (CLV) is one of the key cost metrics that offers a more comprehensive view of your marketing success by focusing on the long-term value each customer brings to your business.
Here’s why CLV should be a key metric for every marketer:
Effective customer segmentation
Not all customers are created equal. CLV helps you segment your customer base into high-value and low-value groups, allowing you to tailor your marketing efforts and messaging accordingly. This means you can focus on nurturing your most profitable customers while optimizing your approach for others.
Improved retention strategies
CLV shows you how much each customer is worth throughout their relationship with your business. By understanding this, you can create targeted retention strategies that keep valuable customers coming back, reducing churn and increasing their lifetime value.
Informed decision-making
With a clear picture of CLV, you can make smarter decisions about your marketing strategies. Whether it’s deciding on promotions, loyalty programs, or customer service improvements, knowing the value of your customers helps guide these decisions effectively.
Better budgeting decisions
Knowing your CLV helps you allocate your marketing budget more wisely. Instead of throwing money at customer acquisition without knowing if it will pay off in the long run, you can invest more strategically in acquiring high-value customers who will bring in more revenue over time.
Ultimately, understanding CLV allows you to measure the true return on your marketing investments. It’s not just about the immediate gains but the long-term profitability of each customer. This way, you ensure that your marketing strategies are delivering real value and driving sustained business growth.
Common traps to avoid when tracking CLV
Today, we have access to more information than ever before. It can be difficult to wrap your arms around all that data, let alone your head. Marketers often report feeling overwhelmed by all this data.
Without a strong data foundation, it can be really difficult to extract meaningful insights, particularly when it comes to Customer Lifetime Value (CLV). As the landscape evolves, marketers must navigate several key challenges to effectively track and utilize CLV.
So, we’ve laid out three critical challenges that marketers face when tracking CLV, along with some advice on how to address them:
1. Data accuracy and integrity
Inaccurate or incomplete data can mislead your understanding of CLV, impacting decision-making and strategy. Gathering data from various sources can lead to inconsistencies and errors, which skew CLV calculations. Issues might arise from manual data entry errors, improper integration of data sources, or outdated tracking systems.
Action point: Implement automated data collection and validation systems to ensure accuracy. Regularly audit and clean your data to maintain its integrity, and use reliable data integration tools to minimize errors.
2. Compliance and privacy
With strict data protection laws like GDPR, managing customer data responsibly has become more complex. Non-compliance can lead to hefty fines and erode customer trust, affecting your ability to track and utilize CLV effectively.
Action point: Stay updated on privacy regulations and ensure your data practices comply with legal requirements. Invest in secure data management systems and train your team on data protection best practices to avoid legal pitfalls.
3. Effective segmentation and analysis
Accurate customer segmentation is crucial for meaningful CLV analysis. Properly distinguishing between customer groups allows for tailored marketing strategies that address the unique needs and behaviors of each segment, rather than relying on a generic approach. Integrating CLV insights into actionable marketing plans can also be challenging, as marketers often struggle to use these insights effectively to drive targeted campaigns and enhance customer retention.
Action point: Group customer profiles into cohort and perform cohort analysis to refine your customer segmentation and ensure your marketing strategies are aligned with the specific needs of each segment. Regularly update and adapt your strategies based on CLV insights to improve their effectiveness and boost overall customer retention.
Check out our guide on how to read a cohort analysis chart here!
By addressing these challenges with targeted actions, marketers can harness the full potential of CLV and make data-driven decisions that drive long-term success.
Conclusion
And there you have it! While metrics like click-through rates and engagement can be exciting, they only offer a glimpse of your marketing impact. CLV, on the other hand, provides a full view of how valuable each customer is over time, helping you see beyond those initial interactions.
By taking CLV into account, you're not just chasing immediate wins — you're setting yourself up for long-term success. Sure, dealing with data accuracy, compliance, and segmentation can be challenging, but tackling these issues with the right approach will pay off. With a solid CLV strategy, you can make smarter decisions, nurture valuable customer relationships, and optimize your marketing budget like a pro.
