Do you know the value of your customers? Sure, all customers are important; however, some bring more value to your business than others. Understanding how much each customer is worth can help you make decisions about marketing spend, which customers to target, and the best way to engage them.
What is Customer Lifetime Value (CLV)
In marketing, CLV represents the total profit a company makes from any given customer throughout their entire relationship. It is a prediction of future worth based on things like past purchase history, demographics and common behaviors among customers.
The Importance of CLV
Acquiring and retaining customers is not cheap; however, all business owners know you have to spend money to make money. The key is knowing how much you should spend and where to spend it. If you know your CLV, then you can make informed decisions about how much to spend on direct marketing to acquire and retain them.
How to Calculate CLV
So, now that you understand the importance of CLV – let’s take a look at how it is calculated. CLV is calculated using this simple formula:
Average Value of a Sale x Average Number of Purchases x Retention Time in Months or Years = Customer Lifetime Value
To further illustrate this, let’s take a look at an example for a local pet grooming service.
- The average cost per visit (Average Value of a Sale) = $60
- The average number of times the service is used (Average Number of Purchases) = 6 per year
- The average length of time a customer is retained (Retention Time in Years) = 7
- 60 x 6 x 7 = $2,520
For every new customer acquired, the pet grooming service can expect $2,250 in revenue over time.
How to Use CLV
To calculate the ROI of a direct mail campaign, CLV should also be considered. Let’s say the pet grooming service sent out 1,000 postcards for $0.50 per mail piece for a total of $500. The campaign resulted in five new customers. Initially, it may seem like a lot of money to spend to acquire five new customers ($60 x 5 = $300 in new revenue). However, if you consider the CLV, five new customers will result in $12,600 of revenue. Not bad for a $500 investment.
Find the Right Partner
Thinking about using CLV to plan your next direct marketing campaign? AMG can help! Contact us to learn how a partnership with AMG can benefit you.