Metrics. Whatever it is you’re trying to measure with your marketing, there are a lot of different numbers to think about.
But the reality is that most don’t matter. It’s one thing if you need to report to management if they request specific metrics be included in your analysis. But many marketers and businesses end up tracking a lot of vanity metrics that are ultimately irrelevant to a successful campaign outcome.
There is one equation that should be monitored and analyzed with care – CLV or customer lifetime value. Let’s talk about what this is.
What Is Customer Lifetime Value?
CLV is an equation that tells you how valuable a single customer is to your company.
If all your customers only buy a $57 product from you once, then their lifetime value is also $57. But that’s not how it works in most businesses. People that buy from you once are more likely to buy from you again, perhaps a different product or service.
The lifetime value of a customer tells you not only how much the average customer tends to spend with you, but also how much you can realistically spend on marketing and advertising to acquire those customers. It can also yield valuable insights for product development, customer support, and sales.
If you’re spending $100 to attract $57 customers, for example, you’re losing money. Since $57 isn’t a lot of money, you only have a small margin to work with. But if their lifetime value exceeds what you’re spending to acquire them, then you can reliably generate profit from each customer. But you still need to know what that margin is, especially if you’re trying to meet certain business objectives.
How Do You Calculate Customer Lifetime Value?
There are many different methods to calculating CLV, all with subtle differences. So, it may be contingent on your exact business model, or how complicated the sales process is. But for the most part, it’s straightforward.
What you need to do is calculate the revenue earned from a customer, and then subtract the amount of money you spent on acquiring and supporting them.
So, for instance, let’s say your customer spends $2,000 with your business over their lifespan.
First, there’s advertising and marketing. We’ll say the cost of attracting and converting the website visitor into a lead was $200.
The lead was then handed off to the sales team. One rep spent two hours with the prospect converting them into a customer. It costs you $120.
Then, the customer’s account needs to be set up, so that costs another $120.
Finally, your customers require an average of five hours of support over the course of their lifetime. It costs you $75.
When you add up all the costs, you get $515. So, $2,000 minus $515 is $1,485, which would be your CLV.
This is strictly a hypothetical example, but you should be starting to get the idea.
Here’s another simple formula you can use to calculate CLV:
(annual revenue per customer x number of years they remain a customer) – acquisition cost = CLV
Kissmetrics has a detailed infographic covering the subject of calculating CLV, and this is also worth a look if you’d like to go deeper.
We live in a data-driven world, and we make a big thing of metrics. And sometimes the data truly is valuable and useful.
But if the goal of business is to make a profit, then there’s only one equation you need to know, which is CLV. By analyzing it, you can further tweak it and improve upon it. After all, the longer a customer stays with you, and the less time and energy you have to invest in keeping them as a customer, the more profit you’ll ultimately make.
Do you know how to calculate your CLV? What can you learn from it?
Let us know in the comments below.