Why is Customer Lifetime Value important?

People ask: How much should I spend on my postcard marketing campaign? Customer Lifetime Value is a number we can use to answer this question. This number tells you how much your average customer spends with your company. This number can help determine a marketing budget. Also, does it make sense to spend more on your customers than they do on you? No, you would not make a profit! After finding your Customer Lifetime Value, you may want to fix your marketing strategy.

a picture of a pink pig

What is Customer Lifetime Value?

Customer Lifetime Value (CLV) is one way to determine your marketing budget. Customer Lifetime Value is basically a measure of the value of an average customer. You can calculate Customer Lifetime Value by searching for a tool to buy and download. Or you can do these calculations by yourself.

However, if you search for Customer Lifetime Value equations, you will find that there is more than one way to solve for CLV. Kissmetrics, which is a blog on marketing analytics, created a cool infographic with three different equations. They give three equations because you usually use a few different methods to find Customer Lifetime Value. Then, you can find the average of those CLV scores.

calculating customer lifetime value

 

Let’s calculate Customer Lifetime Value.

Example 1: basic Customer Lifetime Value equation

This first example shows you how to do the basic Customer Lifetime Value equation shown on Kissmetrics (linked above).

First, you need to know these things:

  • What does the average customer spend per week?
    • To find this, you could select a random week of the year (or try it for different times of the year). Then, you could find the average amount spent per week by a customer. For example, imagine that you own a coffee shop. You could take the total amount spent by 5 customers, and then divide by 5. Let’s say that the average customer spends $15/week at your coffee shop.
  • What is the average lifetime of a customer?
    • The average lifetime is the average amount of time that a customer continues to do business with you. For example, a typical customer consistently visits your coffee shop for 2 years. coffee shop photo

Second, put your info into the following equation:

52 X (Average $ per Week) X (Average Lifetime of a Customer) = Customer Lifetime Value

52 X ($15) X (2 years) = CLV

$1560 = CLV

shopping mall - customers in actionAnother Way to Calculate Customer Lifetime Value: By Individual Customer’s Average Revenue per Month

An alternate method to find Customer Lifetime Value would involve finding an individual customer’s average revenue per month. This way can help you determine which customers are the most valuable to your business.

Here is an example using an individual customer and all of their purchases:

  • Jack:
    • November 7, 2017: $150
    • November 15, 2017: $200
    • December 1, 2017: $100
    • December 10, 2017: $50
    • December 28, 2017: $100
    • January 2, 2017: $200

To find Jack’s individual Customer Lifetime Value, we will take the average of all of his purchases during the time he has been buying from the company.

Jack has buying from the company for 3 months. Over those three months, Jack has purchased:

$150 + $200 + $100 +$50 + $100 + $200 = $800

Here is how we will find Jack’s Customer Lifetime Value (based on average revenue per month).

  •  $800 (total revenue) / 3 months (length of time Jack has been buying from the company)
    • Jack’s average revenue per month is $266.67.

Next: let’s add another customer.

  • Jill has also been buying from the company from November – January.
  • Jill’s purchases:
    • November 3, 2017: $100
    • December 24, 2017: $55
    • January 9, 2018: $45
  • Her total purchases:
    • $100 + $55 + $45 = $200
  • Jill’s average revenue per month = $200 / 3 months = $66.67

Which customer has a higher Customer Lifetime Value? Obviously, it’s Jack. He spends $200 more per month than Jill.

Next: Let’s say that Jack and Jill are the company’s only two customers. We can also find the average revenue per month of all customers:

  • ($266.67 + $66.67) / 2 = $166.67.

Simple, right?

A third way to find Customer Lifetime Value: By Neighborhood

Let’s suppose that you want to figure out which neighborhoods bring in the most revenue. Then, you can use the Customer Lifetime Value of various neighborhoods to decide where to spend more/less on you direct mail campaign. To do this, we can compare the average monthly revenue per neighborhood.

For example, you have been sending postcards to neighborhood 1 and neighborhood 2 for the past 3 months.

  • Neighborhood 1:
    •  Average Monthly Revenue per Customer: (this is an average of all customer’s purchases living in this neighborhood)
      • January: $50
      • February: $40
      • March: $35

To find the average monthly revenue per neighborhood: Add up the average monthly revenues and divide by 3.

$125 / 3 months = $41.67.

The average monthly revenue of neighborhood 1 is $41.67.

  • Neighborhood 2:
    • Average Monthly Revenue per Customer:
      • January: $50
      • February: $55
      • March: $60

Average monthly revenue of Neighborhood 2 = $165/ 3 months = $55.

As you can see, the average monthly revenue of neighborhood 2 is higher than Neighborhood 1. Your customers in neighborhood 2 have shown to be more valuable than the customers living in neighborhood 1 (so far).

Something to keep in mind:

Look at the average monthly revenues listed for neighborhood 1. Neighborhood 1’s revenue has been decreasing over the course of your direct mail campaign. Increasing or decreasing your marketing for neighborhood 1 may not be the only answer. Instead, you may have to adjust your marketing strategy to appeal to a specific group of people.  For example, maybe most of the people living in neighborhood 1 are elderly, and most of the people living in neighborhood 2 are middle-aged. You might just have to change the design/word-choice on your postcard to make it more appealing to elderly people.

How to use your Customer Lifetime Value report

Obviously, the amount that you spend on marketing per customer should not be higher than the CLV. But by just knowing the CLV, you can determine whether you should increase or decrease your marketing budget. Also, you could use CLV to find which customers are the most profitable. Then, you could focus and spend more on your most valuable customers. For example, you might want to send more postcards to the customers living in the more profitable neighborhoods (areas where the people who buy the most tend to live).

What should you consider when using Customer Lifetime Value?

For one, you may have to try different marketing strategies before you know what works best for your company. Simply increasing or decreasing your marketing budget is not the only answer. Instead, you may want to refocus your spending. If you spend the most of your marketing budget on emails and online ads, then you should try postcard marketing. Postcard marketing has a higher conversion rate than online marketing methods like email.

Here are some downsides to using Customer Lifetime Value:

Customer Lifetime Value does not always remain the same. Customer Lifetime Value can change between seasons. For example, CLV might change during different seasons for a flower shop. In the spring and summer, CLV numbers will probably be higher. In contrast, CLV numbers will be lower in the winter.

Also, your buyers will probably change over time – people will get older, some people will mover away, other people will get richer/poorer, etc.

Another good time to calculate CLV would be a few months after introducing new products/offers or new pricing. The CLV of your customers may be affected be any change that you make in your business practices.

Main point: Customer Lifetime Value should be calculated often.

Customer Lifetime Value only looks at revenue.

You cannot just use CLV to determine your marketing strategy. In addition, you need to know who your target audience is. You might want to tailor your postcard design to appeal to people of different backgrounds (age group, income, etc.).  Sometimes, your marketing strategy is the cause of a lower CLV.

Always make an effort to track and know who your target audience is.

There are a variety of ways to calculate Customer Lifetime Value!

Do not just calculate it one way – find Customer Lifetime Value using a few different methods. Also, you can search for more complex equations that find CLV using additional variables like profit margin. Furthermore, you can buy Customer Lifetime Value tools that can do the work for you.

 

open sign in business

Find Customer Lifetime Value and start your postcard marketing campaign.

Scout can even help you lower your direct mail cost and make your marketing strategy more profitable. Read this article.

Now that you have lowered your EDDM cost - it's mail time!

 

 

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