Customer Lifetime Value(CLTV) : This metric is important if you want to be in the long term game. Customer Lifetime Value is the measurement of revenue or return that a customer is expected to give during a time span of customer relationship. Investing in a prospective customer without knowing their real worth can be a time sink both in terms of time and money. Therefore, in order to invest in your customer’s retention more judiciously, it becomes necessary to quantify the value of your customer.
How is CLTV calculated?
(Average Purchase Value x Purchase frequency x Customer’s life span) - (Marketing Spend/CAC)
The components of the formula can be further explained as following:
Average Purchase Value: An average amount of money a customer spends during a transaction. This can be arrived at by dividing the company’s total revenue by the total number of purchases made during a specific period.
Purchase Frequency: The number of times a customer buys a product within a specific time frame.
Customer’s life span: The time period of the customer's relationship.
What makes CLTV one of the key metrics for marketers?
First let's understand why building upon an existing clientele is better than acquiring new customers.
Increasing Competition: Every sector is seeing a huge surge in competition and everyone is equally equipped with innovation and technology to acquire a new customer or take away your existing ones.
Expensive: Ads are getting increasingly expensive and unaffordable for growing businesses.
Cumbersome: Implementing affordable content marketing or other similar marketing tactics could be difficult
Uncertainty: Even the best acquisition gimmick or campaigns do not come with a guarantee
Brand Value: it's the loyalty from your customers that earns you a brand value in the long run.
So, it's wiser to invest in your existing relationship and CLTV helps to identify which one to focus and put your money in.
LTV by channel
Channels like social media or paid media play a unique role in thriving your client relationships. LTV by channel analyses and compares the customer lifetime value that comes through different channels..
In the below example, we will compare cohorts of customers who came through channel A and channel B in March 2019.
Over a time period of 6 months, Channel B proved to be high LTV as compared to Channel A, even if it means higher CAC in the short term. Because in the long term, higher LTV justifies the CAC as you see in the table above.
Likewise there could be cases, where even if the frequency of purchase makes a customer look very engaged, there would be others who would be building up on your revenue book with few transactions but high average purchase value. CLTV can guide you when and where you can start loyalty program for the profitable category.
LTV by product and offer
Another important piece to this analysis is to find out what has influenced the group to be profitable. Is it the promotional offer that helps to build up on the margin or is there a particular product that increases the brand loyalty.
Let's take an example of a beauty cosmetics brand who came out with a flat promotional offer across all products. However, the customers who purchased a nail color did not come back, whereas, customers who purchased a lip color returned the next month to buy other products too like their mascara and even high value products like perfumes. Going by the customer buying behavior, one product is able to make a bigger impact over another as in this case a lip color is able to win over client trust and acts as an entry point to long term relationships. This insight will help the business to rebuild their marketing strategy.
Your growth depends on how optimally you allocate your marketing budget. Invest more on customers and channels which have high ROI and pull back on the ones eating in your margins. Keep using your historical data for future strategy formulation and then test and learn to guide tactical decisions.