Using CLV Transforms Marketing Strategies

Customer Lifetime Value (CLV) is more than just a marketing buzzword. It is a key metric that can reshape how businesses interact with their customers. Essentially, CLV measures the total revenue a business can expect from an individual customer during the extent of their relationship. Using CLV transforms marketing strategies to use lifetime value as a segmentation variable to focus a firm’s marketing efforts on those customers who represent the greatest value, over time, to the firm. This data can also change the strategic marketing focus from short-term transactions to long-term relationships, encouraging companies to invest in customer satisfaction and retention rather than solely on customer acquisition.

A CLV calculator, using the formula shown below, is an indispensable tool for making this strategic shift. It helps you quantify your customers’ lifetime value so you can create and implement business strategies that improve marketing spending, customer service, and product development.

clv transforms marketing
Image courtesy of Clever Tap

Learn why understanding a customer’s true value over their lifetime helps your company tailor its strategies to maximize long-term profitability rather than just chasing quick wins.

What is CLV?

CLV, in simple terms, is the total revenue a customer is predicted to generate for your business throughout the entire course of your relationship. It essentially measures your customers’ profitability over time. The basic CLV formula uses several key data points, including:

  • Customer lifespan. The average length of time a customer remains a loyal customer.
  • Annual profit margin per customer. Profit earned from each customer transaction over a year
  • Customer Acquisition Costs (CAC). How much money do you invest in acquiring new customers, including marketing, onboarding, and sales costs?

For example, if a subscription service with a $10 monthly fee ($120 per year) retains a particular group of customers for an average of 2 years, and it costs them $5 to acquire those customers initially, the calculated CLV would be:

(120 x 2) – 5 = $235

This means that each customer in this group, on average, brings in $235 in revenue over their lifetime with the company.

Meanwhile, you might have another group of customers who spend far less per year, thus representing a much smaller average lifetime revenue or even cost more than the average value they represent. A company might use this lower CLV to justify imposing certain restrictions that encourage those customers to choose a different provider or increase revenue.

A good example comes from the retail banking industry. A customer with a small balance in their checking account may cost more than the revenue the bank generates from using that money until the customer needs it, a financial term called float. CLV transforms marketing strategies when the bank charges these small customers a monthly service fee or imposes restrictions on the number of checks the customer can write without incurring a fee to ensure the bank doesn’t lose money on them. Similarly, CLV transforms marketing strategies at the bank further when the bank focuses its marketing efforts on larger depositors, such as offering them free checking or higher interest rates on checking balances.

Using CLV transforms marketing strategies

Knowing your CLV goes beyond just crunching numbers. It can transform your entire business strategy by:

  • Shifting your focus from transactions to relationships. CLV encourages you to view customers as long-term partners, not just one-time sales. This can help build brand loyalty and promote positive customer experiences, leading to long-lasting benefits
  • Guiding your marketing efforts. CLV helps you target your customers with personalized marketing campaigns instead of a shotgun approach, allowing you to tweak your messaging and offerings based on individual customer value. As in the banking example shared earlier, CLV encourages you to develop offerings that appeal to customers representing the highest value. Using CLV transforms marketing strategy in a way similar to the balancing act shown in the graphic below. For instance, in analyzing your website revenue using a tool like Google Analytics, you can track performance by customer segment (Google Analytics offers a means to calculate CLV by customer segment with a little tweaking). Let’s say you find that most site visits come from younger consumers while the highest revenue comes from older ones. That suggests you should change the focus of your marketing to entice more older consumers to visit your site. using clv to explode ROI
  • Shaping product development. By analyzing CLV data, you can discover which customer segments generate the most value. This knowledge can help you develop products and services to meet specific customer demands represented by this valuable group, ensuring they appeal to your most loyal buyers.
  • Influencing your pricing. CLV insights can also guide your pricing strategies. For example, you might offer subscription models or flexible pricing options for different customer segments with varying CLVs, ensuring you remain profitable while building loyalty.
  • Optimizing customer retention. Understanding CLV lets you calculate the retention cost formula, helping you evaluate how effective your customer retention efforts are and identify areas where you can improve.

Enhancing CLV through operational changes

While understanding the basics of CLV is essential, real progress comes from taking action.

Here are some ways to put CLV principles into action and maximize customer lifetime value:

  • Invest in exceptional customer service. Happy customers are more likely to stick around. Prioritize excellent service to increase buyer satisfaction and extend the customer lifespan with your company.
  • Implement loyalty programs. Reward repeat purchases and engagement with loyalty programs, creating a sense of exclusivity and turning regular customers into brand advocates.
  • Use customer feedback. Regularly gather and analyze customer feedback to address their needs, improve your products and services, and retain satisfied customers for the long term.
  • Leverage technology. Use technology and automation, such as Customer Relationship Management (CRM) systems and social media listening tools, to personalize customer interactions, improve their purchasing experience, and build stronger relationships.

Measuring and monitoring CLV

Understanding CLV is essential, but it’s only the first step. To make the most of this knowledge, you need effective measurement and monitoring processes. Here’s what you need to do:

  • Tools and techniques

While the theoretical concept of CLV is important, putting it into practice requires the right tools and techniques, like a CLV calculator and CRM system, to analyze data effectively.

Online customer lifetime value calculators or dedicated software can simplify CLV calculations, saving you time and effort. These tools often require basic customer data inputs, like annual total spend and average number of years they remain as a customer, to provide quick estimates of individual or overall CLV.

Customer Relationship Management (CRM) systems store valuable data like purchase history and interactions, enabling you to analyze individual customer value and identify trends.

  • Integrating CLV into performance metrics

Don’t let CLV operate in isolation. Integrate it into your existing performance metrics, such as customer acquisition cost and retention rate, to see the bigger picture and understand how your efforts are affecting long-term profitability.

  • Regular review and adjustments

Regularly analyze your CLV metrics, both overall and segmented by customer groups, and adjust your strategies based on the information you receive. Schedule regular CLV reviews, identify trends and patterns, and adapt your strategies accordingly to ensure your business remains adaptable and delivers the value that supports long-lasting customer relationships.

Give your brand a strategic advantage

CLV-focused strategies can help you move beyond a transactional approach to your customers and build lasting, profitable relationships. This translates to increased customer loyalty, a more positive brand reputation, and sustainable business growth.

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