What is customer lifetime value (CLTV)
Customer Lifetime Value (CLTV) is a measure of the projected revenue a customer will generate during their time as a customer of your business. It’s calculated with an understanding of the frequency of their spend, and how long they will continue to spend for. The CLTV number is valuable. It helps set your marketing budget, analyse and improve your acquisition strategy, allocate your resources more appropriately and accurately forecast future spending.
CLTV as a single figure is an average. It estimates how much a customer is likely to be worth for your business, using historic data. The best way to use this data is by comparing it to your total marketing investment. Through dividing the amount invested by your forecasted CLTV figure, you can see whether you are generating a positive return on investment.
Working with CLTV as an average, however, can be misleading, as some customers will have a significantly higher lifetime value than others. It is therefore crucial to understand the differing values of your customers in order to allocate your budget effectively and optimise your marketing plans. In simple terms, when you know which customers are high-value, you know who to focus your attention on – and exactly how much money you should be spending on them.
Without an accurate measurement of Customer Lifetime Value by customer segment, you’re essentially relying on guesswork to determine which customers deserve your attention. This will lead to you wasting time and resources on customers who aren’t likely to stick around.
Let’s say you own an online shoe store and you’ve got a comprehensive marketing strategy set up. You’re focusing on a never-ending stream of social media campaigns, sending out emails to customers several times a month, and posting blogs on your website every week. This is all great, but the problem is that most of the people who receive your emails and come across your campaigns simply never intended to buy another pair of shoes from you. So, you’ve spent a lot of time, effort and money on these low value customers, when you could’ve attained the same number of good-quality leads for far less.
Understanding Customer Lifetime Value has therefore become crucial for brand survival as competition has become more fierce; consumers are quickly switching from one brand to another and acquisition costs are rising.
The good news is that once you gain a deeper understanding of your customers, you will able to greatly improve your return on investment and reap the rewards in the long run, which is, after all, every marketer’s dream.
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