Does it ever feel like too much focus is placed on customer quantity and not enough on quality?
Think about it: What’s the point of having thousands of low-quality customers who make one purchase and churn? You’re wasting time, money, and resources — which is why you need to be tracking your CLV.
Customer Lifetime Value, or CLV, is the “total amount of money a customer is expected to spend in your business, or on your products, during their lifetime.” Keeping this definition in mind, it follows that some customers will be more profitable than others.
While CLV is only a “prediction of the value your relationship with a customer can bring to your business” — it can still be used to figure out which personas and target audiences are likely to be the most valuable.
When you’re able to focus campaigns and marketing efforts on consumers that will likely bring in higher profits, you’ll see a real change in your campaigns’ success.
Therefore, this article will discuss what CLV is, as well as why it’s so important for a healthy marketing strategy.
What is CLV, and How is It Calculated?
As we’ve already established, CLV is the total amount of money a customer is expected to spend on your brand over the length of your mutual relationship. Let’s look at a very basic CLV calculation:
CLV = the average value of a purchase X the number of times the customer will purchase each year X the average length of this customer’s relationship (in years).*
*While some CLV calculations also include average gross margin, the above option is a great place to start.
For example, say you’re the brand manager of a company that sells candles — scented, unscented, in jars, etc. — called “HeavenScent”.
Let’s look at a target audience with an excellent CLV: Spa managers. Buying on average around 50 scented candles each month, spa managers are a goldmine for a brand like yours. To calculate their CLV:
$25 per candle X 600 candles per year X 5 years = $75,000
Obviously, targeting spa managers is a top priority for your brand — even if they aren’t a huge target audience.
Now, let’s consider a more frequent but less profitable target audience: employed women aged 25-45 living alone.
$25 per candle X 24 candles per year X 3 years = $1800
While this is also a solid target audience, they are clearly less profitable than spa managers. Therefore, while both should be advertised to, as a brand manager, you know which audience should get a bit more attention.
Keep in mind: calculating the CLV for a new target audience is tricky, as you likely won’t have enough data until a few weeks or months have passed (depending on the size of your customer base).
However, when you have amassed enough data on your target audiences, it’s a very good idea to calculate each one’s CLV. Why? Let’s dig in.
Why is CLV So Imporatant?
Now that you know how to calculate CLV, let’s discuss why it’s important for a healthy marketing strategy. Consider a quote from Custora’s Guide to CLV:
“Rather than thinking about how you can acquire a lot of customers and how cheaply you can do so, CLV helps you think about how to optimize your acquisition spending for maximum value rather than minimum cost.”
Using CLV to inform your marketing strategy allows you to be more efficient in your budget planning because you know which audiences you should focus on first. By investing in stronger audiences first, you more easily set your brand up for success.
However, keep in mind that CLV is an estimate and one of the key values used — the length of the customer relationship — cannot be guaranteed.
Therefore, make sure everyone understands that CLV is a periodic value and is usually only fixed for a 12 or 24-month period, depending on your industry. It also follows that you’ll need to recalculate CLV regularly and reevaluate your target audience importance in order to use this metric effectively.
Now, let’s look at some of the main benefits of calculating CLV for your brand.
Knowing the CLV of different customer personas and target audiences can help you figure out:
Who your most profitable customers and target audiences are
How much you should spend on acquiring lookalike customers while retaining profitability
How much you should spend to retain or win back customers
Which products and services customers with high CLV prefer/provide the highest profitability
How to improve customer retention
Let’s break down each of these points. First, knowing your CLV will help you figure out who your most valuable customers are — and that doesn’t mean it’s automatically the customer with the highest CLV. You need to take other factors into account, such as acquisition and maintenance costs.
While a certain group of customers might have the highest CLV at face value, they might also be the most expensive to acquire and retain — meaning they may move down on your list.
Next, CLV lets you know how much money you should spend on acquiring lookalike customers while retaining profitability. If you know the CLV of a certain target audience, you then know how much you can realistically spend to acquire new members and remain in the green. This helps brand managers plan more realistic budgets.
CLV also helps you figure out how much you can spend to retain or win back certain customers. Remember — while the probability of selling to a new customer is between 5%-20%, the probability of selling to an existing customer is between 60%-70%.
What does this translate to? Selling your products and services to existing customers will generate a good deal more profits than selling to new customers. Therefore, knowing your CLV will help you see where you need to allocate more budget and resources to encourage those with high CLVs to increase the length of their relationship with your brand.
Another thing knowing CLV can help? Figuring out which of your products and/or services are preferred by customers with high CLVs and which are the most profitable. Consider our earlier example of the candle company, “HeavenScent”. While, overall, they sell more unscented candlesticks to their entire customer base, those with high CLVs prefer the scented candles in jars — plus, they turn a higher profit.
So while HeavenScent’s brand manager should still push ads for unscented candlesticks to certain target audiences, they would be smart to spend more time and resources advertising their scented candles in jars to their top target audiences.
Finally, knowing CLV helps improve customer retention and provides a more comprehensive look at your brand’s health. By taking a longer time frame into consideration, brands can see with “greater precision to determine whether (their) current acquisition and retention strategy is designed for scoring quick wins or supports steady and sustained growth.”
Keeping this idea in mind, it’s also good to calculate both historical and predictive CLV — where historic CLV is the sum of the overall profit of a customer’s previous purchases and predictive CLV models the transactional behavior of a customer to predict future purchase behavior.
As the behavior of customers and target audiences change over time, having both calculations on hand can help provide a better understanding of overall CLV.
How Will Tracking CLV Improve My Brand Strategy?
There are many ways that tracking CLV will improve your overall brand strategy, but let’s look at the most important ones:
Improve Brand Communication: With the data that CLV provides, you’ll be able to tailor brand communication for individual target audiences. For example, now that you know that customers with a higher CLV prefer scented candles in jars, you can create customized offers for them to increase sales and drive profits.
Optimized Customer Acquisition: Knowing CLV will also allow you to optimize your acquisition strategy, as you can target potential customers with higher predictive CLV — which is also likely to lead to higher overall profits.
Identify Customers to Win Back: Calculating CLV also makes it clear which churned customers should be targeted for win-back campaigns. If you’re aware of which groups had the highest CLVs, you’ll know who to focus your efforts on when crafting this aspect of your brand strategy.
Overall, knowing the CLV of your top target audiences and customer personas will allow you, as a brand manager, to make more informed marketing decisions.
There are many ways that knowing CLV will make your job as a brand manager a whole lot easier — after all, having more data and a deeper understanding of customer behavior never hurt anyone.
However, keep in mind that CLV is a predictive calculation and, therefore, not a guarantee. Furthermore, CLV is bound to change, as consumers’ needs and wants shift over time. Remember to recalculate CLV regularly to make sure your data-driven decisions are up-to-date.
And if you want to back up your CLV calculations with even more consumer insights and data, consider using brand monitoring to monitor your target audiences’ brand associations, ad awareness, and funnel KPIs.