Customer Lifetime Value
Customer Lifetime Value Overview Customer lifetime value (CLV) is the total worth of a customer to a business over the entirety of their relationship. CLV is an important metric because it represents an upper limit on spending to acquire new customers. Reasons to use CLV from a marketing perspective: The adage that it costs less to retain existing customers than it does to acquire new ones is certainly still true for most marketers. According to Marketing Metrics, the probability of selling to a new prospective customer is 5%-20% whereas the probability of selling to an existing customer is 60%–70%. CLV can help you decide how much your company should invest in retaining existing customers and how you should divide budget between retention and acquisition. Ultimately CLV can give you a strong indication of your company’s health in the long-term. Is your current acquisition and retention strategy built for making quick wins in the short term or is it helping achieve sustainable growth? This, potentially, is even more important for social ventures who often have income generation and impact creation directly linked to one another. As such we could also look at how impact is created for the beneficiary, is it at the point of first exposure to the product or service? Or is it later into the relationship? This could make it a lot more significant for social ventures to focus on retention of customers rather than focusing on acquiring new ones.Understanding Your Sector Creating the CLV is relatively easy assuming you have the data at hand but understanding the CLV is where it gets a little trickier. Interpreting whether a company has a good CLV can come from sector information, comparison to competitors and interpreting their own numbers. On this last point you should look at how long the business retains customers, how much it costs to attract customers, how much it costs to retain customers and how much profit they can make from each customer. It’s important to try and improve the CLV, as for most businesses it’s more efficient to retain a customer than attract one, so maximising the CLV could lead to the greater earnings and impact. Creating Customer Segments and Collecting Data Whilst it would be great to have all the information from a CRM system I know in many cases this isn’t possible so you could look in a few different places for the information:
- Accounting systems – look at where payments have been made from, for how long and relating to what products/services
- Attendance records or sales trackers – looking for how often customers have used your services or bought your products and calculating back their value
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- 4?? Many of the social ventures we work with provide different products, services or have major contracts with different organisations (e.g. different local authorities) as such you can split the CLV calculation up depending on the product, contract holder or whatever other variable you want to work with but likewise you can do it for the whole business. For instance it might be helpful to establish what the company’s average CLV is and compare it to a specific geography to see how it’s performing. Just a quick note to say obviously the larger your sample size the better, doing this exercise with only a few customers may really affect the CLV you produce. Calculation Simple:
However there are plenty of other metrics you can factor in to create a more accurate measure, this is covered in the complex version of the CLV calculation, but does require a longer time period of data collection, high quality data, a good understanding of your customers and sector.
Complex: TBC Definitions: **Average Customer Acquisition Cost: **CAC can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent. Average Customer Profit: is the profit the firm makes from serving a customer or customer group over a specified period of time, specifically the difference between the revenues earned from and the costs associated with the customer relationship in a specified period. Average Lifetime: average length of time a customer stays with an organisation How to Improve CLV 3 variable. Customer lifetime, profit, acquisition cost Best practice to monitor CLV, could it be part of KPIs Creating a way that SEs can self monitor these variables Other variables good to know: retention rate Resources Excel Spreadsheet saved in VM Resource Pack called “Customer Lifetime Value” https://www.youtube.com/watch?v=d_ITwKiruJE https://www.youtube.com/watch?v=GPSysUOV240 https://en.wikipedia.org/wiki/Customer_lifetime_value https://econsultancy.com/what-is-customer-lifetime-value-clv-and-why-do-you-need-to-measure-it/ 15 ways for companies to increase customer lifetime value Example – The Filo Project TBC **Example – **CareCalls TBC Example – Local Treasures We do use a lifetime value calculation. It is really high for Local Treasures, because our employees (treasures) are so amazing, that our customers stay with us for a long time and because of the types of jobs that we get used for - gardening and cleaning are by their nature, regular jobs. We use cohort analysis to track our customers over time. The cohorts are based on the months that they join, for example May 2014, June 2016, January 2015 and so on. Then we track those groups over time and average the cumulative commission they spend with us in total. Our LTV is £662.
Downloadable Resources
- [Customer Lifetime Value FILO pt2](/sales/assets/Customer Lifetime Value - FILO pt2.xlsx)
Excel - [Customer Lifetime Value](/sales/assets/Customer Lifetime Value.xlsx)
Excel - [case study](/sales/assets/case study.webp)
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