Customer Lifetime Value: Are Your Customers Good for Business?

handBusinesses are starting to move on from older metrics such as exposure and conversion rate to newer, more modern metrics such as engagement and customer acquisition ratio. As the market continues to grow and change direction, the newer metrics provide businesses the right instruments to measure performance, particularly the impact of their marketing campaigns and business operations.

A popular metric is Customer Lifetime Value or CLV, also known as lifetime value (LTV). What is lifetime value and how can the metric be used to measure business performance? That is what we are going to find out in this article.

Getting to Know CLV

Customer lifetime value is basically a forecast of value a customer will contribute throughout the duration of their relationship with your business. In simple terms, it is the total amount of money customers will spend to get your products and services in the long run. CLV is usually predicted based on purchase history, customer behavior, product life cycle, and other factors.

A customer that regularly buys $10 worth of products every two weeks has a higher CLV than a customer that buys $100 worth of products once. This metric takes the relationship your business has with customers into consideration, providing you with a clearer view from multiple sides. CLV tells you about the growth of the business and the kind of customers you have.

How Valuable Are Your Customers?

Lifetime value provides a lot of insights on its own, but it is even more revealing when used with other metrics. The most common use of CLV is for determining the value of customers. You take the projected lifetime value and compare the metric with Customer Acquisition Cost or CAC. Comparing CLV and CAC lets you know just how valuable the customers you get really are.

Let’s say you allocate $1,000 for marketing. In the old days, you measured the marketing campaign’s performance by conversion. As long as you hit a certain conversion rate, the campaign was deemed successful.

Thanks to CLV and CAC, you are no longer limited to a single purchase when reviewing a campaign. You can take customers’ lifetime value and see if the $1,000 you invested earlier brings sufficient value to the company. A healthy ratio of CLV:CAC is around 3:1. A ratio higher than that means you don’t spend enough in attracting and maintaining customers.

Working on Your CLV

There are plenty of ways you can boost your business’s lifetime value. You can improve customer loyalty with the help of better insights, tailored customer retention campaigns, and other tactics. You can make data-driven decisions to keep existing customers happy. More importantly, you can spend more time listening to customers and delivering the customer experience they actually want.

At the same time, you can fine-tune your marketing efforts to target high-value market segments. This way, the new customers you attract are customers with high potential lifetime value just waiting to be developed. Pushing for a faster, more sustainable growth is so much easier when you direct your energy and resources on maintaining a sufficient level of CLV.

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