CLV: One key metric that every company must measure

Customer Lifetime ValueIn this digital and customer-centric age, organizations must change their strategy from “product-focus” to “customer-focus” to engage and retain customers. Understanding customers and knowing the Customer Lifetime Value (CLV) has become very important for all companies, especially B2C. But, very few companies truly know their CLV.

Just 42% of companies are able to measure customer lifetime value (Source: eConsultancy)

Other companies have challenges to calculate CLV because there are so many different parameters and demographic and macro influences that will shape the calculation process. It’s time for remaining 58% to catchup.

The importance of calculating CLV is becoming more and more clear, especially as web profitability metrics shift priorities from page views to engagement.

CLV should be one of the measures driving Marketing Strategy …

Customer Lifetime Value (CLV) is projected amount of revenue a customer will generate over their lifetime doing business with your company.

Many start-ups die because they underestimate the cost to acquire new customers and very often cost to acquire new customers > monetization (CLV). Why is this? Startups are so focused on transactional cost of acquiring customers but pay little attention to invest in customer experience and service after the conversion.

Let’s say, you launched and new product and is doing awesome – great sales, great PR, etc. Now, you want to scale up your acquisitions efforts by running marketing campaigns. The question is – how much should the Marketing/Sales dept spend for campaigns? Which customer segments? How much should my Customer Service dept spend on servicing customers? What products should I offer? etc. CLV answers such questions.

All Marketers focus on “Lead Generation”, which is important. But many CMOs have no idea on how much is the lead worth. When you have a definitive CLV and understand your lead-to-customer conversion rate you know exactly how much a lead is worth, and how much you should be willing to spend on new leads – in turn help marketers tweak customer acquisition strategy.

CMOs must ensure that every product has CLV number attached to it

Let’s take an simple example  – Let’s apply this first step to one of the hottest subscription services out there: Dollar Shave Club. A subscription is $9/mo. In return, customers receive 4 replacement cartridges per box. How much should Marketing spend to acquire a new customer? Let’s find out.

  • CLV = (Average Order Value) x (Number of Repeat Sales) x (Average Retention Time). Pls note that this is simplest formula. There are other variables that I have not factored to this calculation.
  • CLV = $9 * 12 months * 5 years  = $540
  • This means that user acquired today would be expected to generate revenue of $540 over next 5 yrs, OR  $180 per year.  If company wants to break-even within a year, company can afford to spend up to $180 on marketing/sales to acquire a user i.e. Customer Acquisition Cost (CAC) = $180

If CAC is known,

  • CLV = average revenue from customer/year * average retention rate – CAC.

Two things to keep in mind – (a) CLV > CAC; and (b) CAC should be recovered in about a year.

CLV for some Fortune 500 companies

Many companies do not release CLV information as this could give competitors advantage to their strategy. So, we can only go by analysts calculations and a few industry reports.

  • Apple: iPhone = $700 to $900; Mac = $600 to $650; iPad = $275 to $300 (Bernstein)
  • eCommerce companies: Best in class = $3600; Other companies = $1300 (RJMetrics)
  • Starbucks, supposedly, has CLV of ~25K. Read on for Starbucks CLV analysis.
  • Netflix = $291.25

Conclusion

Understanding CLV specific to individual/segmented customers can help marketers target specific product/content. Customer’s happiness = success for brand -> more revenue for company.

Do you know you CAC and CLV?