There are so many metrics and data in any business evaluation that it’s really easy to lose yourself in the abundance of them. Still, there are some business metrics that are the most essential along with Customers Lifetime Value being one of them. We’ve prepared this guideline to discover the mysterious CLV, and how using it impacts your business.
What is customer lifetime value in marketing?
Customer Lifetime Value, or CLV (CLTV) is the total value a customer brings you over time. This metric has many names, but the meaning is the same. It’s been used by analytics, marketers, C-level managers, and business owners while making decisions about sales, product development strategy, or customer support.
It is necessary to ensure that the cost of soliciting a client does not exceed the income from the entire cycle of interaction with him, otherwise you will instantly go broke.
Why is customer lifetime value important to your business?
Everyone wants to fulfill KPIs and nobody wants to work at a loss. The marketing strategy is precisely based on the fact that incomes exceed expenses, and the LTV, or CLV ratio is a reliable detector of the current state.
The CLV metric also has some key advantages:
- Defining the most loyal customers. The most loyal ones are those with the highest CLV. In most cases, they have the largest average check, or shop often, bringing you profit. Pay special attention to them, and work on your marketing campaign making them stay with you as long as possible.
- Helping find out the ways of how to make your customers stay longer with you. theIf customer acquisition cost rate (CAC) is higher than customers lifetime value (CLTV), you need to focus on increasing customer shopping time, or finding more effective acquisition channels.
- Gaining a better understanding of behavioral patterns. You will be able to set up communication with your on the website depending on the value of the lifetime value rate and understand what exactly drives them to buy your products.
How to calculate LCV: basic formula
There are several formulas for calculating the LTV (CLV) coefficient, they should be applied to depending on the characteristics of your company, your KPIs and the purpose of your calculations.
Nevertheless, the basic formula is the following:
CLV equals Customer revenue per year multiplied by Duration of the relationship in years.
Calculating CLV metrics should be dialed into a specific business, and the basic formula cannot fit any company. When calculating CLV, you might face some challenges:
- The data you have is not enough. To find out the input of a customer, you should also have an accurate data set like how long the customers are expected to be loyal to your brand, and how often they purchase your products.
- The data can change. Your business offers, strategy, or products can change, and the data you have might be less important in future.
- Possible risks. Everything can change today, and one day you have everything perfectly calculated, and the other one brings you unpredictable situations (like the worldwide lockdown in 2020).
Automate LCV analysis with RFMcube
At RFMCube, we help our clients boost the effectiveness of their marketing.
RFMCube is an advanced multipurpose platform that can be connected with your database to keep your sales history up to date, identify key segments of your marketing, and provide you with automated calculations and reports. The platform benefits:
- Quick start. You don’t need to set up anything, as your database will be synchronized automatically in a few simple steps;
- Automated reporting. You get the maximum analysis freedom and have all necessary metrics calculated, including the Customer LifeTime Value according to your database.
- The API keys make it easy to share the results with your team by email or via Facebook Adv.
With RFMCube platform, you get once-click marketing automation. Nothing can scare our API, so the platform is highly integrated with other platforms and additional software.