Someone you work with is turning to you for help regarding Customer Lifetime Value. It turns out that you don’t know too much about it.
Stress less! Here are some common questions you can expect to get on the subject – And the corresponding answers to make you sound like an expert.
What is Customer Lifetime Value (CLV)?
In short, CLV is a measure of what a customer will spend with your brand over time. This forecasted dollar value is an amount assigned to a single customer, representing the cumulative amount of revenue she or he is estimated to bring your brand in a set number of years in the future, following their first purchase.
Where is CLV used?
CLV is put to best use in the calculation of a brand’s ROI associated with digital media spend.
What are the benefits of using a CLV?
- It can help brands to become more profitable in their digital marketing efforts.
- With a more holistic understanding of a single customer’s long term value, you’re able to better align your media spend against this figure over time.
- When analyzing ROI on a last click basis, you’re essentially looking at a touch point with a customer in a vacuum. With an overarching CLV figure, your approach to how much you spend on acquiring or retaining a customer is subject to change – as you would possess the insight into how much they stand to bring your brand in future.
How would a CLV change the way I approach investment in media?
Let’s take a familiar scenario. Imagine a brand with strict DR goals and a recently discovered middle-of-the-road CLV.
From here, we can choose to go in one of two directions in terms of media investment trajectory. Whichever way we choose to go will remain largely based on our level of confidence in the CLV’s relationship and alignment with attaining the brand’s current goals. #ThatDRLife
- Profitability is more important than scale.
- In this regard, a brand might consider focusing on enhancing its loyalty program, driving up its CLV over time. Examples can include marketing to increase the frequency of customer purchases and/or upselling within your current product/service showcase.
- Scale is more important than immediate profitability.
- In this instance, a brand would look to maximize its investment in paid media up to the point that the CLV allows for a breakeven or near-breakeven point. Essentially an upper spend limit is established for those signing IOs and pulling levers.
In both scenarios, having an accurate Customer Lifetime Value helps to pivot toward increased long term profitability and eliminates the margin of error in doing so.
How do I calculate CLV?
Good news. It ain’t rocket science. There are two main approaches. And a robot, too.
- The Historic
- The Predictive
- The Machine
The Historic method is a simpler, more directional approach.
CLV (Historic) = (Transaction1+Transaction2+Transaction3…+TransactionN) X Ave Gross Margin
The Predictive method is more complex but more accurate according to the experts. (That’s you now.)
CLV = ((Ave Monthly Transactions X AOV) X Ave Gross Margin) X Ave Customer Lifespan
The third method is cheeky and super fast.
Plug your values into this machine and sit back and watch the magic.
What are the challenges and pitfalls of putting CLV on a pedestal?
- Nominal values – If you’ve got 20 years’ worth of data, you’ll probably run the risk of overvaluing your CLV and in turn think you’re doing a better job of hitting ROI than you actually are. Put simply, a Dollar isn’t worth what it was when Bill Clinton was president. Your data will need to be smoothed to account for a discount rate in the currency’s valuation. It’s doable. But it will take time.
- Organized, Big Data – If you have a weak grasp of your historical performance data, get a handle on that first before deciding on a figure that will your shape your marketing investments and perceived returns for the foreseeable future.
- Long Live Dynamic Models – There may be the tendency to adopt the “set it and forget it” approach when it comes to establishing a CLV. One must remember however that advertising is fluid. Should your marketing focuses and associated investments change over time, your model inputs will need to change accordingly to ensure you remain on the right track.
You’re good to go. Now get out there and impress some important people.