While the importance of Customer Lifetime Value (CLV), also known as Lifetime Value (LTV) or customer LTV, has been a topic of discussion in marketing circles for some time, it has not been embraced fully as a key performance indicator (KPI) in most organizations’ marketing strategies. LTV is the most important metric that companies currently ignore, and should become a keystone metric to measure customer value going forward.
Up until recently, businesses have mostly relied on third-party cookies to inform their digital marketing activities. But with the evolution of data privacy laws around the globe, marketers need to embrace first-party data to have a more personal, one-to-one conversation with their customers and prospects. This can lead to improving customer lifetime value.
One of the most popular, purpose-built platforms for ingesting and integrating first-party data to be used to affect the customer experience across the full customer journey is the customer data platform (CDP). CDPs have been gaining popularity over the past few years because they can collect customer data from disparate silos and create a single customer view from that data. This gives organizations the ability to manage first-party data centrally to provide users the right to control their data.
CDPs allow you to understand your customers as full individuals, and can affect content and the customer experience through more relevant offers and messaging, improving retention and creating brand advocates with greater customer lifetime value.
What is Customer Lifetime Value?
Customer Lifetime Value represents a customer’s value to a company during their lifespan as a customer. Knowing the value of a customer will allow companies to make smarter and more informed decisions regarding how much budget and resources are allocated, and how profitable their marketing efforts will be. Knowing LTV enables a company to focus on its most loyal and profitable customers, and the ones most likely to become advocates. Marketers who know a customer’s LTV have a better base of business intelligence to make decisions to maximize effectiveness of their ad spending.
LTV is a critical metric for any business that relies on subscription-based models and monthly recurring revenue. Since the pandemic, online retailers have seen a 90 percent growth in subscribers across all verticals but only an average LTV growth of 11 percent during 2020, according to Recharge Payments. With more people open to and trying subscription services than ever before, and the projected size of the global subscription market forecast to reach $478.2 billion by 2025, focusing on retention to improve LTV and reducing churn of new customers is a key step for companies that rely on recurring revenue business models.
Check out: 3 Ways to Improve Your Ad Spend with a CDP
How to Calculate Customer Lifetime Value
Lifetime Value can be calculated in a variety of ways, depending on your business model, pricing, and customers. Different types of customers can have different LTVs, especially if you have different pricing tiers that they fall into.
If you are using a subscription-based model, one method to calculate LTV is to take the average monthly revenue expected from each customer and then divide it by your churn rate. For example, if you charge $250 per month and your churn rate is 5 percent then your LTV for a new customer is (250/0.05) or $5,000.
If you are using a non-subscription model, you can calculate based on a more historical method.
(Yearly Revenue from Customer) x (Relationship length in Years) – (Total Acquisition and Serving Costs).
For example, a customer spends $1,000 per year with you, and they have been a customer for five years. You spent $100 on acquisition costs. In this case, $1000 x 5= $5,000. Then $5,000 – $100 = $4,900, which is this customer’s LTV.
Using a CDP to Improve Customer Lifetime Value
For many organizations, getting an accurate and complete read on LTV is challenging because customer data is spread out across multiple data silos and customer touchpoints. These data sources include points-of-sale (in-store, online, phone, mobile apps, IoT, etc.), social media, and other ways a company interacts with its customers, like through a call center. Following are several ways a CDP can improve customer lifetime value.
- CDPs provide a unified customer profile that combines activities across channels and interaction points, making it easier to calculate LTV with greater accuracy.
- A CDP can can enable one-to-one personalization for successful data-driven marketing campaigns.
- CDPs allow marketers to collect visitor data of your website or applications and build a 360-degree profile for them.
- Based on the customer data collected, you can segment the data based on various categories and behaviors.
- Companies are leveraging CDPs for advanced analysis, actionable insights, and the ability to do predictive segmentation and predictive analytics to know what customers want before they know it themselves.
Today, in an environment where customers expect more from brands in terms of experience and relevance than ever before, brands must differentiate themselves by providing superior contextualized content, messaging, and experiences.
Understanding your customers as complete people, not just segments or anonymous targets, is what will enable your company to deliver the kind of highly personalized customer experiences that will improve retention, increase loyalty, and improve the overall LTV of your customers.
Customer LTV is a data-driven, customer-centric metric that all companies need to establish as a keystone KPI for their organizations. Tracking and focusing on LTV will allow you to retain your most valuable customers, increase revenue from less valuable customers, and improve the overall customer experience across multiple touchpoints. LTV will push your organization to pay attention to the full customer journey buying cycle, and help you spot issues you may not have noticed prior.