Customer lifetime value (CLV or customer LTV) is the predicted sum of all future revenues (or profits) that a particular customer will generate for a business. The customer lifetime value metric—used for a variety of marketing and analytical purposes—can be measured in numerous ways.
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“From a marketing perspective, it is imperative to measure LTV,” said Kyle Turk, vice president of marketing for Keynote Search. “If you think about your cost per acquisition, knowing the LTV will allow you to budget more effectively to attract customers. If you simply base your ROI off of the first purchase, you will not be realizing the true long-term value of converting a customer.”
Savvy marketers understand that LTV is becoming a more important topic nowadays for several reasons: margins are tightening so every dollar spent and every dollar earned has a greater impact, marketing costs are rising, customers are expecting personalized experiences, and attention spans are decreasing, allowing fewer opportunities to capture customer interest.
Laura Ciannamea, founder & strategist for Remotely Collective, said CLV should be treated as the holy grail, considering that acquiring a new customer is a costly business.
“Because the cost to acquire a new customer can be up to 25 times higher than retaining a current one, focusing on customer satisfaction and retention deeply impacts profitability and can be a competitive advantage in itself,” she said. “Not only will you be able to afford a higher cost per acquisition and outdo competitors if your overall LTV is higher, but you’ll be able to market additional products to an existing base of customers at a fraction of the cost.”
According to Marketing Metrics, an existing customer is 60-70% more likely to make additional purchases, so you need to keep those customers happy. The longer they stick with you, the higher their LTV, and the higher your profits.
Why the Need to Understand LTV
Intercom’s SVP of marketing, Shane Murphy-Reuter, said that understanding LTV helps marketers ensure they are spending on the right ad placements and other marketing materials that will add value to their business and generate more revenue.
“In turn, LTV helps marketers unlock additional budget for their programs,” he said. “For instance, it can help marketers determine whether or not they should be spending more on acquiring larger customers that are more likely to stick around for longer, or smaller customers that are sometimes more likely to churn by quantifying the return on investment associated with different marketing spend scenarios.”
Maximizing LTV
For companies looking to maximize LTV, it’s essential to use the three pillars of marketing campaigns—email, retargeting campaigns, and social media—to target those who have either just made purchases, generated traffic, or frequently add to your bottom line.
Ciannamea noted that the first step toward ensuring a healthy LTV is to identify your top 10% of customers—the ones that show the highest open and click-through rates on email, the ones who spend the most each time they shop, etc.
“Thank your customers after their purchase and look at the marketing funnel as a circle instead of a triangle, because the customer’s experience is not over after the purchase. A simple thank you can go a long way,” she said.
Nourish your customers with real value and create a personalized, enjoyable experience along their entire journey. This can be done with email sequences that offer special incentives to repurchase, retargeting paid media campaigns, or special content that can help customers have a better experience with a product.
Murphy-Reuter noted that a great strategy is to pair your LTV with your customer acquisition cost (CAC), which is money spent on sales and marketing divided by number of customers. This helps businesses predict if acquired customers will contribute more revenue than cost.
“You can also look at LTV by channel or segment level metrics; however, we warn against getting too caught up in overanalyzing a given customer’s value by doing too much micro-optimization,” he said. “At the end of the day, you could cut your business by 75 different dimensions in pursuit of a growth opportunity, or you could just focus on the big ones that matter and move the needle for your business.”
Live chat can have a dramatic impact on LTV, as this tool is one of the only communication channels that threads an entire customer journey, from prospect to loyal customer.
Intercom’s data has found that customers who chatted spend 13 times more over their lifetime because they’re more loyal over the long run.
“Live chat is an extremely powerful tool to help increase LTV because it helps businesses build better, more personal relationships with customers,” Murphy-Reuter said. “With the likes of WhatsApp, Facebook Messenger, WeChat and iMessage, we’ve seen FB Messenger rise to become the primary customers communicate. The same advantages it holds over email in personal communications exist in business communications: it is faster, more personal, and much more powerful.”