And If You Don’t Know, Now You Know – The Notorious CLV (Customer Lifetime Value)
How much is a new customer worth to your business?
The amount should roll off your tongue as easily as the lyrics to your favorite song. Customer lifetime value (CLV) is widely accepted in the business world as a must-know metric. And while few refute the importance of this number, surprisingly many professionals struggle defining and calculating it. Are you one of them? That’s ok. Let’s break down the lifetime value of a customer, verse by verse.
Intro – What Is Customer Lifetime Value (CLV)?
When we talk about CLV, we’re referring to the estimated revenue a customer will generate during the entire span of their relationship with your company.
It is not the average value of a single transaction, but rather the projected profit you can expect from a customer for as long as they remain a customer. This is why CLV is such an important number to know when planning your marketing efforts. It answers the question of how much are you willing to pay for a new customer.
In fact, if you’re one of the nearly 10,000 professionals who have attended our Direct Mail Crash Course, then you know that presenter Keith Goodman opens the seminar with the nuts and bolts of CLV and his fictional “busload of paying customers” analogy:
Imagine a bus full of brand new, qualified customers pulls up to your store, business or website. Each passenger is a perfect match for your products, services or events. They are ready to spend and have cash, check, purchase order and credit card in hand. How much is that busload of new customers worth to you?
It’s a far-fetched scenario but alumni from the Crash Course rave about how valid and effective Keith’s metaphor is for grasping the significance of CLV.
Hook – How Do I Calculate Customer Lifetime Value (CLV)?
The typical CLV calculation is:
(Average Profit of a Sale) X (Number of Transactions Annually) X (Average Retention Time in Years)
This basic formula can apply to nearly all types of business models. Here’s an example in action:
|Customer Lifetime Value Calculator|
|Average Selling Price||$300|
|Cost to Produce||$-150|
|Average Gross Profit||$150|
|Annualized Value (4X)||$600|
|Average Lifespan in Years (3X)||$1,800|
The CLV in this case is $1800. It’s important to know that there are many variations to the CLV formula, but this uncomplicated version is effective and reliable for measuring customer profitability. And the less complex the arithmetic is, the easier it is to recalculate CLV – especially if your business model has different customer segments or if your average selling price changes regularly.
Chorus – What Do I Do With Customer Lifetime Value (CLV)?
Now that you know how much money you’re going to make, on average, from each customer you acquire, you know the upper limit for your acquisition advertising spend. If you spend less than your CLV to acquire a customer, you’re making money. And as you increase the lifetime value of each customer, the more you can afford to spend to acquire new ones. The more total customers you acquire, the more revenue you make. Those are fun numbers to crunch.
Bridge – What Other Benefits Should I Factor In For Customer Lifetime Value (CLV)?
Don’t forget some of the other indirect benefits you gain from each new customer, such as their ability to bring you profitable new customers through referrals and word of mouth. Or the increase to social media reach if they become an advocate for your brand on Instagram, Facebook, Twitter, etc. And if they have positive feedback to share about your business, they’ll likely post on a popular online review site.
All of the additional publicity you gain by winning a new customer makes them worth even more to your business. You may not have to put a dollar value on these encore benefits, but it’s important to keep them in mind when you’re measuring a customer’s full value.
Mic Drop – Conclusion For Customer Lifetime Value (CLV)
Before you spend another dime of your marketing budget, know your CLV.
If you need a little back up for your next direct marketing campaign performance, the experts at Modern Postcard can personalize a strategy to make sure that the name of your tune is profitability. And to learn even more powerful advice for driving new business, attend Modern Postcard’s Direct Mail Crash Course roadshow. Find a touring location near you and register at modernpostcard.com/seminar. And now you know.
By Jeanine Norlin, Senior Marketing Manager, Modern Postcard
Call a Direct Marketing Specialist at 800.959.8365.