Client Lifetime Value (CLV) seems like one of those nebulous marketing data terms only analysts understand. But over time, I’ve learned it is SO much more than a spreadsheet label. My own first CLV “aha” was learning that a 10% increase in retention can double CLV. THAT got my attention. It’s a tangible, actionable metric worth paying attention to because it helps you make decisions that produce the one thing you need to help you reach your company’s goals: more profit. In this brief article, I’m going to demystify CLV for you — and maybe revolutionize your business.
What is CLV?
According to The Economic Times, CLV is “the present value of the future cash flows or the value of business attributed to the customer during his or her entire relationship with the company.” When you know CLV, it helps you make decisions about sales, marketing, product development and customer support.
There are two ways to calculate CLV: the simple way and the formula way.
Simple CLV Calculation
Subtract cost of supporting a client over the course of a year (C) from average revenue a client produces in a year (R), then multiply by average number of years you keep a client (Y):
(R – C) Y = CLV
Formula CLV Calculation
Subtract cost of supporting a client over the course of a year (C) from average revenue a client produces in a year (R), then apply a multiplier (M) based on retention rate percentage. Use the following multipliers for different percentage retention rates:
60% 1.2
70% 1.75
80% 2.7
90% 4.5
(R – C) M = CLV
When you know CLV for different audiences, you can determine which ones warrant more of your marketing. Amazon, for example, determined Kindle owners spend about $1,233 per year buying stuff from Amazon, and Amazon Prime members spend $1,340 annually. Other customers spend only $790. This helped Amazon determine its most profitable customer segments and then increase CLV for them, rather than wasting marketing money on least-profitable audiences.
Read more examples of the way companies use CLV in this article at BarnRaisers.
Using CLV to Determine Marketing and Promotion Budgets
At yorCMO, we create a budgeting framework for each audience based on its CLV. For example, a company typically will look for 10% to 20% returns on investment for acquiring new clients. Another way to look at it: for every dollar you spend on client acquisition, there should be a 5 to 10 times return.
Let’s use 10% as an easy example. If a client is worth $10,000 CLV, a company should be agreeable to spending $1,000 to acquire the client. Retention costs (marketing and sales efforts) over the life of a client also should be calculated to ensure a satisfying profit. You can see how this helps determine which campaigns and projects to invest in and how far to go in your efforts to acquire and retain a client. It also can be very helpful in setting specific objectives for long-term sales.
Knowing CLV not only helps you determine how much to spend on marketing, but it can help you justify marketing costs.
Add CLV to Your Marketing Toolbox
No matter what marketing system you use, ensure the value of your efforts by taking time to calculate CLV and compare it to sales and marketing metrics (we can help). And don’t forget about getting a 10% increase in retention to double CLV. This tool is not just for data crunchers!
About the Author:
Jamie is a results-driven marketing leader with 20+ years of success developing strategic plans and innovative multi-channel marketing programs. Over her career she has helped B2B organizations with all aspects of marketing, including branding, corporate communications, public relations, content strategy, web, marketing automation, social media, digital/SEO and event marketing.
Jamie is based in the Washington DC Metro area and has orchestrated go-to-market strategies for clients in the professional services, training, government, information technology and financial services sectors.