Customer Lifetime Value (CLTV) is a metric used by businesses to determine how much money a customer will spend on your goods and services throughout their entire time as a customer. By calculating a customer’s lifetime value (LTV), you can determine how much value a certain type of customer can bring to your brand, and thus, ensure success by incorporating what you’ve learned about their behavior into your campaigns.
Still there? Continue reading to learn more about how you can make use of such a metric to guarantee long-term success for your brand!
What is Customer Lifetime Value (CLTV)?
When it comes down to it, what you want to do as a marketer is to ensure long-term success rather than quick bursts of short-term successes, and the way to do it is by careful evaluation of where you place your investments.
Plainly put, as a marketer you shouldn’t focus too much on how quickly or cheaply you can acquire new customers, but instead, on how to optimize the customer acquisition process so that you are spending your money in terms of their maximum value rather than minimum cost.
CLTV is your answer to this issue. With proper calculations, you can estimate how long your relationship with a certain customer might last and create an efficient marketing strategy with a budget that suits your estimations. Allowing you to start treating your customers as true individuals rather than just identical numbers on a page. Because, in the end, not all customers are equal. Some will spend more than others, and some will stay loyal longer than others. Those are the customers that you want to pay most attention to. As they’re the ones that will bring the most value to your business.
How is Customer Lifetime Value Calculated?
CLTV is a metric that has a periodic value. That means that you can choose how long this period lasts based on what works for your business — although the standard is often fixed to a 12 or 24-month period.
It is calculated with a very simple formula, although countless other factors may be included (should you wish to do so):
CUSTOMER VALUE = Average Customer Lifetime x Average Order Value x Average Order Frequency.
When you’ve finished your calculations, your next goal is then to strive to make sure that your average CLTV is always higher than your average Customer Acquisition Costs (CAC). As that is one way you can ensure that you are using the metric correctly.
Why is Customer Lifetime Value Calculated?
The answer to this is quite simple, and the numbers speak for themselves. For example, according to statistics from Gartner, 80% of your company’s future revenue will come from just 20% of your existing customers. We can take this even further by looking at the statistics that tell us that you have around a 5-20% chance of selling a product to a new customer, which is three to four times less than if you were to sell a product to a repeat customer, the probability of which sits at around 60-70%!
And so, again, the reason why CLTV is so widely used is that it will allow you to evaluate how much you should invest in retaining the customers that you already have. It will guide you through marketing decisions that will allow you to lower your acquisition costs while focusing on what matters — high customer retention rates.
CLTV is your answer to steady and sustainable growth. This is why it is so widely prized by marketers, and why marketing automation platforms like Maropost are proud to declare that their product can help one increase their customer’s LTV.
It’s ‘THE’ roadmap that you should follow that will lead you to expansion and long-term success. All while answering all the pertinent questions that you need to know about a single customer to ensure that they stay loyal to your brand.
This is why CLTV is used by so many marketers worldwide in 2020. And why, ultimately, you should be doing the same.