Trying to figure out how much you can—or should—spend on marketing your business can be intimidating. One metric that makes this decision much easier is Customer Lifetime Value (CLV)—a key to knowing what each client is worth and how much you can invest in reaching them. Spend too much and you risk losing money. Don’t spend enough and you could miss valuable opportunities to attract new business and generate more revenue.
When marketing your company or latest offer, Customer Lifetime Value is one of the most important metrics to understand. Without it, you’ll never know how much you can actually spend on your marketing efforts and still turn a profit. While calculating a basic CLV is simple, many marketers skip this step—limiting their ability to build a financially sustainable business.
Before we dive in: If you’re looking for more insights on growing your business through smart marketing decisions, explore more tips in our Digital Marketing Blog.
What Is Customer Lifetime Value (CLV)?
By definition, Customer Lifetime Value or CLV (or even CLTV or LTV) is the prediction of the net profit attributed to the entire future relationship with a customer. Simply put – it is how much money, on average, you will make from a single customer in a given time frame.
Why Customer Lifetime Value Matters for Your Business
As a business professional you should understand that any metric that reflects your business is equally important as the next. However, when it comes to marketing, CLV may be one of the most important. If calculated correctly, you will have a valuable benchmark that can be used many times in marketing, sales, product development and even customer service. Let’s dive in and see how we can get this working for you.
How to Calculate Your Customer Lifetime Value
Don’t worry you don’t need a degree in economics or quantitative finance to figure out your CLV. There are many advanced formulas you can use but we will focus on a standard, easy to follow formula for the purpose of this post.
Average Sale Amount x Average Amount of Repeat Sales x Average Lifetime of Customer = Customer Lifetime Value
Here’s an example:
A parking garage in Boston charges $50 a month for a membership/space in their lot.
On average the members last 5 years. The garage can store up to 150 vehicles.
Using the formula above, we can find out the CLV of one member.
Average Sale Amount ($50) x Average Amount of Repeat Sales (12 per year) x Average Lifetime of Customer (5 years)
So,
$50 x 12 x 5 = $3,000
Following the example, the average Customer Lifetime Value of the garage is $3,000.
How to apply it.
Now that you have figured out your customer lifetime value you need to put it to good use. Let’s take a good look at where and when you can use it – (using the above example)
Marketing – when marketing the parking garage, the owners now know they can spend up to $3,000 per member and still break even. This could mean MORE direct mail pieces, HIGHER QUALITY pieces, or even a STRONG digital campaign in addition to their physical efforts.
They can also take the formula to the next level and multiply the CLV by the total possible members (150), to see how much they can spend marketing the garage as a whole.
CLV x Total Possible Members = Total Business Customer Lifetime Value
$3,000 x 150 = $450,000 (per 5 years)
Sales – as the garage sells memberships they may choose to have promotions to increase member sign-up. Now that they have a per member CLV and total business CLV they can determine how much of a discount they can offer and still remain profitable in the long run.
Customer Service – another overlooked use of CLV is when businesses budget for customer service. Using their CLV the garage knows how much per month or year it can spend on retaining customers to increase the overall average lifetime of the members. This will subsequently increase cash flow and prepare the garage for long term success.
But you don’t own a garage!
The garage now knows they can spend up to $450,000 in a five-year span on marketing to, acquiring and retaining new members. They probably had no idea they could spend that much money and still turn a profit. The same applies to you, your business and your next campaign.
Chances are you don’t own a garage but you may be preparing to launch your next marketing campaign with us. So using your CLV you can ensure that you are putting your best foot forward. You could find out that you can upgrade to higher quality mailers, mail more pieces or even slowly expand to different territorieswithout risking your entire budget.
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