One of the first mentions of customer lifetime value was in the 1988 book Database Marketing: Strategy and Implementation by Robert Shaw and Merlin Stone. Customer lifetime value (CLV) represents the value of a customer to a company over time. It represents a critical business metric, especially for SaaS or recurring revenue-based businesses.
Aspect
Explanation
Concept
Customer Lifetime Value (CLV) is a critical metric in marketing and business strategy that quantifies the total expected revenue a business can earn from a customer throughout their entire relationship. CLV helps companies understand the long-term value of acquiring and retaining customers, enabling more informed decision-making about marketing investments, customer acquisition costs, and customer retention strategies.
Key Components
CLV typically consists of the following components: – Average Purchase Value: The average amount a customer spends on each purchase or transaction. – Purchase Frequency: The average number of transactions a customer makes over a specific period. – Customer Lifespan: The estimated duration of the customer’s relationship with the business. – Retention Rate: The percentage of customers retained over a specified period. – Discount Rate: The rate used to discount future cash flows to their present value.
This provides the CLV for a single customer. To account for changes in the value of money over time, you can apply a discount rate to calculate the present value of future cash flows.
Application
CLV has several practical applications in business and marketing: – Marketing Budget Allocation: Businesses can allocate their marketing budget more effectively by focusing on acquiring and retaining high CLV customers. – Customer Segmentation: CLV helps segment customers into high-value, medium-value, and low-value groups, allowing for customized marketing strategies. – Pricing Strategies: It informs pricing decisions by understanding how customers’ purchase behaviors affect their long-term value. – Product Development: Businesses can prioritize product development efforts based on the preferences and needs of high CLV customers.
Benefits
Understanding CLV provides several benefits: – Informed Decision-Making: Businesses can make data-driven decisions about resource allocation, marketing strategies, and customer retention efforts. – Profit Maximization: By identifying high CLV customers and nurturing those relationships, businesses can maximize profits. – Competitive Advantage: Utilizing CLV data can give a competitive advantage by tailoring marketing efforts to customer segments effectively.
Challenges
Challenges associated with CLV include: – Data Accuracy: Accurate CLV calculations require clean and reliable customer data, which can be challenging to obtain and maintain. – Complexity: CLV calculations can become complex when accounting for various factors such as seasonality, changes in customer behavior, and discount rates. – Assumptions: CLV calculations often rely on assumptions about customer behavior, which may not always hold true.
Real-World Application
E-commerce platforms, subscription-based businesses, and retail chains commonly use CLV to optimize their marketing strategies and customer relationship management. Subscription services like Netflix and Amazon Prime focus on retaining high CLV subscribers by continuously offering value and personalized content.
Table of Contents
Understanding customer lifetime value
Early adopters began using the concept soon after, and it has largely kept pace as the speed and complexity of the buyer journey increased at the turn of the millennium.
Customer lifetime value represents the total amount of money a customer is expected to spend on a business or product during their lifetime.
The CLV of a Ferrari owner may equate to $2 million, given the target demographic and quality or longevity of Ferrari’s sports cars.
The CLV of a coffee addict to Starbucks may be just as lucrative when one considers how many cups of coffee are consumed over decades.
For businesses, this is a significant value because it determines how much money should be spent acquiring new customers versus retaining existing ones.
Ultimately, CLV is a measure of customer relationship profitability, which should be higher than the cost of acquiring the customer in the first place.
Calculating the customer lifetime value
Customer lifetime value can be calculated by multiplying the average order value, purchase frequency, and average customer lifetime measured in years.
For example, consider a long-distance runner who, on average, purchases a $220 pair of shoes twice a year for five years.
The customer lifetime value is then 220 x 2 x 5 = $2,200.
There are two general CLV calculation models.
Historical customer lifetime value
As the name suggests, this model uses previous data to predict customer value and is helpful for businesses whose customers only interact with them over a certain period.
Notably, the historical model does not consider whether the customer will continue to purchase from a business in the future.
Predictive customer lifetime value
Predictive customer lifetime value forecasts the buying behavior of existing and new customers.
It can identify the most valuable customers, products, or services and improve retention.
Why is customer lifetime value important?
Customer lifetime values provide clarity on customer acquisition and retention costs, but it also plays a vital role in the following:
Value-based customer segmentation
When an organization can identify its most valuable customers, it can send targeted VIP offers to reward loyalty.
Data describing these buyers’ demographics can then be used in lookalike modeling.
In this strategy, the business defines the attributes of a high-value customer and then looks for similar traits in other segments or demographics.
Lastly, value-based customer segmentation can be used to upsell low-value customers to increase their CLV.
Competitive advantage
Economic or market moats represent long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.
Business has never been more competitive, particularly online. Customer lifetime value is a useful tool for market differentiation because it maintains a focus on the customer.
Growth
Some companies use customer lifetime value to justify spending more money acquiring new customers.
Thus reducing churn and incentivizing repeat customer spend which are both critical factors for businesses based on recurring revenues.
What’s the difference between CTV and LTV?
The customer lifetime value is the dollar value attributed to a customer based on the purchase history or on a forecast of the total purchase the customers will make throughout the overall relationship with the brand.
LTV is the lifetime value of a customer, and it’s, in many cases, equivalent to the customer’s lifetime value.
This metric is highly used in SaaS, which is a business model primarily based on subscription revenues.
Since the subscription is usually spread across various months or years, a SaaS company tries to understand what money it can invest upfront in sales and marketing activities to acquire a customer.
Indeed, being correct about attributing the right customer lifetime value is critical to preventing a software company from facing hardship over time.
In many cases, SaaS companies fail to correctly attribute the customer lifetime value, thus overspending on customer acquisition.
In other cases, a SaaS company might do the opposite, accounting for a too-conservative lifetime value, which then slows down growth, as the company will be underinvested when it comes to bringing in new customers.
CTV and churn rates are critical metrics for any software startup.
Key takeaways
Customer lifetime value represents the value of a customer to a company over a predetermined time period.
Customer lifetime value can be calculated using historical or forecasted data by multiplying average order value, purchase frequency, and average customer lifetime measured in years.
Customer lifetime value allows an organization to focus its efforts on high-value customers where the return on investment is likely to be more significant. This strategy can be strengthened by increasing customer retention and reducing the churn rate.
CLV Calculation Examples:
E-commerce Business: An online clothing retailer calculates that the average customer buys $100 worth of products every two months and remains a customer for two years. CLV = $100 x 6 = $600.
Subscription Service: A streaming platform estimates that subscribers pay $15 per month and stay subscribed for 3 years on average. CLV = $15 x 12 x 3 = $540.
Coffee Shop: A local coffee shop determines that a loyal customer spends $5 per visit and frequents the shop twice a week for five years. CLV = $5 x 2 x 52 x 5 = $2,600.
SaaS Company: A software company offering a monthly subscription service calculates that their customers pay $50 per month and stay with them for four years. CLV = $50 x 12 x 4 = $2,400.
Applications of CLV:
Targeted Marketing: An e-commerce company identifies high CLV customers and offers them exclusive discounts and promotions to encourage repeat purchases.
Customer Segmentation: A mobile app developer categorizes users based on their CLV, tailoring in-app experiences and advertising accordingly.
Retention Strategies: A telecom company focuses on reducing churn among high CLV customers by providing exceptional customer service and loyalty rewards.
Product Development: An online marketplace uses CLV data to prioritize new product features that will benefit their most valuable customers.
Customer Loyalty Programs: A hotel chain introduces a loyalty program that rewards high CLV guests with free nights and upgrades.
Advertising Budget Allocation: A digital marketing agency allocates a larger budget to campaigns targeting segments with high CLV customers.
Subscription Pricing: A SaaS company adjusts its subscription pricing to better align with the CLV of different customer segments.
Difference Between CTV and LTV:
SaaS Company: A SaaS startup correctly attributes the CLV of its customers, enabling it to make informed decisions about customer acquisition costs.
Online Retailer: An e-commerce business uses CLV to optimize its advertising spend, ensuring that the cost of acquiring a customer is lower than their CLV.
Subscription Box Service: A subscription box service calculates CLV to determine how much they can invest in marketing and customer acquisition efforts.
Mobile App Developer: A mobile app developer monitors CLV to identify when users typically churn and designs engagement strategies to extend their lifetime.
Key Highlights:
Introduction to Customer Lifetime Value (CLV):
CLV is the value a customer brings to a company over time.
It’s a crucial metric for SaaS and recurring revenue-based businesses.
Understanding CLV:
CLV is the total amount a customer is expected to spend on a product or business throughout their lifetime.
Examples include the CLV of a Ferrari owner or a Starbucks coffee addict.
CLV helps in deciding how much to spend on acquiring new customers vs. retaining existing ones.
Calculating CLV:
CLV can be calculated by multiplying average order value, purchase frequency, and average customer lifetime.
Example: A long-distance runner spending $220 on shoes twice a year for five years has a CLV of $2,200.
Two CLV Calculation Models:
Historical CLV uses past data to predict customer value.
Predictive CLV forecasts the buying behavior of existing and new customers.
Importance of CLV:
CLV helps in value-based customer segmentation, targeting valuable customers, and upselling low-value customers.
It contributes to building a competitive advantage and sustaining growth.
CLV is particularly significant for businesses with recurring revenues.
Difference Between CTV and LTV:
CLV and LTV (Lifetime Value) are often equivalent, especially in SaaS businesses.
CTV (Customer Lifetime Value) focuses on customer purchase history and is critical for subscription-based companies.
Correctly attributing CLV is essential for balanced customer acquisition and growth strategies.
Key Takeaways:
CLV represents a customer’s value over a specific period.
It guides businesses in focusing on high-value customers, enhancing customer retention, and reducing churn rates.
Accurate CLV calculation is crucial for effective resource allocation and long-term business success.
Case Studies
Scenario
Description
Implications
Example
Subscription-based Service
In subscription-based businesses, CLV represents the expected revenue generated from a customer over the duration of their subscription.
Example: A streaming platform estimates that a subscriber, on average, will stay for 24 months and pay $10 per month. Therefore, the CLV for a subscriber is $240.
E-commerce Retail
For online retailers, CLV calculates the expected total spending of a customer over the course of their relationship with the company.
– Aids in personalized marketing and product recommendations. – Supports budget allocation for customer acquisition and retention campaigns.
Example: An online fashion retailer predicts that a customer will make five purchases per year, with an average order value of $50, and will remain active for four years. The CLV for this customer is $1,000.
B2B Software as a Service
In B2B SaaS companies, CLV estimates the total revenue a business customer is expected to generate during its subscription period.
– Influences pricing tiers and contract lengths for business customers. – Guides customer success and support efforts to ensure customer satisfaction and retention.
Example: A cloud-based software company projects that a business client will subscribe for three years at an annual cost of $5,000. The CLV for this business customer is $15,000.
Retail Banking
In the banking sector, CLV calculates the expected revenue generated by a banking customer over their lifetime as they use various banking products and services.
– Drives cross-selling and upselling strategies. – Helps identify high-value customer segments. – Informs investment in customer experience and service improvements.
Example: A bank calculates that a customer is likely to maintain a checking account, savings account, and mortgage over their lifetime. The estimated CLV for this customer is $50,000.
Mobile App Monetization
For mobile app developers, CLV estimates the revenue generated by a user through in-app purchases, ads, or subscriptions during their app usage.
– Supports user acquisition campaigns and ad targeting strategies. – Guides decisions on app pricing and monetization models. – Drives efforts to enhance user engagement and retention.
Example: A mobile game developer predicts that a user will spend $5 per month on in-app purchases and ads for an average of 12 months. The CLV for this user is $60.
The Net Promoter Score (NPS) is a measure of the ability of a product or service to attract word of mouth advertising. NPS is a crucial part of any marketingstrategy, since attracting and then retaining customers means they are more likely to recommend a business to others.
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Affinity marketing involves a partnership between two or more businesses to sell more products. Note that this is a mutually beneficial arrangement where one brand can extend its reach and enhance its credibility in association with the other.
As the name suggests, ambush marketing raises awareness for brands at events in a covert and unexpected fashion. Ambush marketing takes many forms, one common element, the brand advertising their products or services has not paid for the right to do so. Thus, the business doing the ambushing attempts to capitalize on the efforts made by the business sponsoring the event.
Affiliate marketing describes the process whereby an affiliate earns a commission for selling the products of another person or company. Here, the affiliate is simply an individual who is motivated to promote a particular product through incentivization. The business whose product is being promoted will gain in terms of sales and marketing from affiliates.
The bullseye framework is a simple method that enables you to prioritize the marketing channels that will make your company gain traction. The main logic of the bullseye framework is to find the marketing channels that work and prioritize them.
Brand building is the set of activities that help companies to build an identity that can be recognized by its audience. Thus, it works as a mechanism of identification through core values that signal trust and that help build long-term relationships between the brand and its key stakeholders.
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The brand essence wheel is a templated approach businesses can use to better understand their brand. The brand essence wheel has obvious implications for external brand strategy. However, it is equally important in simplifying brand strategy for employees without a strong marketing background. Although many variations of the brand essence wheel exist, a comprehensive wheel incorporates information from five categories: attributes, benefits, values, personality, brand essence.
The brand equity is the premium that a customer is willing to pay for a product that has all the objective characteristics of existing alternatives, thus, making it different in terms of perception. The premium on seemingly equal products and quality is attributable to its brand equity.
Brand positioning is about creating a mental real estate in the mind of the target market. If successful, brand positioning allows a business to gain a competitive advantage. And it also works as a switching cost in favor of the brand. Consumers recognizing a brand might be less prone to switch to another brand.
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Content marketing is one of the most powerful commercial activities which focuses on leveraging content production (text, audio, video, or other formats) to attract a targeted audience. Content marketing focuses on building a strong brand, but also to convert part of that targeted audience into potential customers.
One of the first mentions of customer lifetime value was in the 1988 book Database Marketing: Strategy and Implementation written by Robert Shaw and Merlin Stone. Customer lifetime value (CLV) represents the value of a customer to a company over a period of time. It represents a critical business metric, especially for SaaS or recurring revenue-based businesses.
Customer segmentation is a marketing method that divides the customers in sub-groups, that share similar characteristics. Thus, product, marketing and engineering teams can center the strategy from go-to-market to product development and communication around each sub-group. Customer segments can be broken down is several ways, such as demographics, geography, psychographics and more.
Developer marketing encompasses tactics designed to grow awareness and adopt software tools, solutions, and SaaS platforms. Developer marketing has become the standard among software companies with a platform component, where developers can build applications on top of the core software or open software. Therefore, engaging developer communities has become a key element of marketing for many digital businesses.
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Field marketing is a general term that encompasses face-to-face marketing activities carried out in the field. These activities may include street promotions, conferences, sales, and various forms of experiential marketing. Field marketing, therefore, refers to any marketing activity that is performed in the field.
interaction with a brand until they become a paid customer and beyond.
Funnel marketing is modeled after the marketing funnel, a concept that tells the company how it should market to consumers based on their position in the funnel itself. The notion of a customer embarking on a journey when interacting with a brand was first proposed by Elias St. Elmo Lewis in 1898.
Funnel marketing typically considers three stages of a non-linear marketing funnel. These are top of the funnel (TOFU), middle of the funnel (MOFU), and bottom of the funnel (BOFU). Particular marketing strategies at each stage are adapted to the level of familiarity the consumer has with a brand.
A go-to-market strategy represents how companies market their new products to reach target customers in a scalable and repeatable way. It starts with how new products/services get developed to how these organizations target potential customers (via sales and marketing models) to enable their value proposition to be delivered to create a competitive advantage.
The term “greenwashing” was first coined by environmentalist Jay Westerveld in 1986 at a time when most consumers received their news from television, radio, and print media. Some companies took advantage of limited public access to information by portraying themselves as environmental stewards – even when their actions proved otherwise. Greenwashing is a deceptive marketing practice where a company makes unsubstantiated claims about an environmentally-friendly product or service.
Grassroots marketing involves a brand creating highly targeted content for a particular niche or audience. When an organization engages in grassroots marketing, it focuses on a small group of people with the hope that its marketing message is shared with a progressively larger audience.
Growth marketing is a process of rapid experimentation, which in a way has to be “scientific” by keeping in mind that it is used by startups to grow, quickly. Thus, the “scientific” here is not meant in the academic sense. Growth marketing is expected to unlock growth, quickly and with an often limited budget.
Guerrilla marketing is an advertising strategy that seeks to utilize low-cost and sometimes unconventional tactics that are high impact. First coined by Jay Conrad Levinson in his 1984 book of the same title, guerrilla marketing works best on existing customers who are familiar with a brand or product and its particular characteristics.
Hunger marketing is a marketing strategy focused on manipulating consumer emotions. By bringing products to market with an attractive price point and restricted supply, consumers have a stronger desire to make a purchase.
Integrated marketing communication (IMC) is an approach used by businesses to coordinate and brand their communication strategies. Integrated marketing communication takes separate marketing functions and combines them into one, interconnected approach with a core brand message that is consistent across various channels. These encompass owned, earned, and paid media. Integrated marketing communication has been used to great effect by companies such as Snapchat, Snickers, and Domino’s.
Inbound marketing is a marketing strategy designed to attract customers to a brand with content and experiences that they derive value from. Inbound marketing utilizes blogs, events, SEO, and social media to create brand awareness and attract targeted consumers. By attracting or “drawing in” a targeted audience, inbound marketing differs from outbound marketing which actively pushes a brand onto consumers who may have no interest in what is being offered.
Integrated marketing describes the process of delivering consistent and relevant content to a target audience across all marketing channels. It is a cohesive, unified, and immersive marketing strategy that is cost-effective and relies on brand identity and storytelling to amplify the brand to a wider and wider audience.
The marketing mix is a term to describe the multi-faceted approach to a complete and effective marketing plan. Traditionally, this plan included the four Ps of marketing: price, product, promotion, and place. But the exact makeup of a marketing mix has undergone various changes in response to new technologies and ways of thinking. Additions to the four Ps include physical evidence, people, process, and even politics.
Marketing myopia is the nearsighted focus on selling goods and services at the expense of consumer needs. Marketing myopia was coined by Harvard Business School professor Theodore Levitt in 1960. Originally, Levitt described the concept in the context of organizations in high-growth industries that become complacent in their belief that such industries never fail.
Marketing personas give businesses a general overview of key segments of their target audience and how these segments interact with their brand. Marketing personas are based on the data of an ideal, fictional customer whose characteristics, needs, and motivations are representative of a broader market segment.
Meme marketing is any marketing strategy that uses memes to promote a brand. The term “meme” itself was popularized by author Richard Dawkins over 50 years later in his 1976 book The Selfish Gene. In the book, Dawkins described how ideas evolved and were shared across different cultures. The internet has enabled this exchange to occur at an exponential rate, with the first modern memes emerging in the late 1990s and early 2000s.
Microtargeting is a marketing strategy that utilizes consumer demographic data to identify the interests of a very specific group of individuals. Like most marketing strategies, the goal of microtargeting is to positively influence consumer behavior.
Multichannel marketing executes a marketing strategy across multiple platforms to reach as many consumers as possible. Here, a platform may refer to product packaging, word-of-mouth advertising, mobile apps, email, websites, or promotional events, and all the other channels that can help amplify the brand to reach as many consumers as possible.
Multi-level marketing (MLM), otherwise known as network or referral marketing, is a strategy in which businesses sell their products through person-to-person sales. When consumers join MLM programs, they act as distributors. Distributors make money by selling the product directly to other consumers. They earn a small percentage of sales from those that they recruit to do the same – often referred to as their “downline”.
The Net Promoter Score (NPS) is a measure of the ability of a product or service to attract word-of-mouth advertising. NPS is a crucial part of any marketing strategy since attracting and then retaining customers means they are more likely to recommend a business to others.
Neuromarketing information is collected by measuring brain activity related to specific brain functions using sophisticated and expensive technology such as MRI machines. Some businesses also choose to make inferences of neurological responses by analyzing biometric and heart-rate data.
Neuromarketing is the domain of large companies with similarly large budgets or subsidies. These include Frito-Lay, Google, and The Weather Channel.
Newsjacking as a marketing strategy was popularised by David Meerman Scott in his book Newsjacking: How to Inject Your Ideas into a Breaking News Story and Generate Tons of Media Coverage. Newsjacking describes the practice of aligning a brand with a current event to generate media attention and increase brand exposure.
A microniche is a subset of potential customers within a niche. In the era of dominating digital super-platforms, identifying a microniche can kick off the strategy of digital businesses to prevent competition against large platforms. As the microniche becomes a niche, then a market, scale becomes an option.
We can define pull and push marketing from the perspective of the target audience or customers. In push marketing, as the name suggests, you’re promoting a product so that consumers can see it. In a pull strategy, consumers might look for your product or service drawn by its brand.
Real-time marketing is as exactly as it sounds. It involves in-the-moment marketing to customers across any channel based on how that customer is interacting with the brand.
Relationship marketing involves businesses and their brands forming long-term relationships with customers. The focus of relationship marketing is to increase customer loyalty and engagement through high-quality products and services. It differs from short-term processes focused solely on customer acquisition and individual sales.
Reverse marketing describes any marketing strategy that encourages consumers to seek out a product or company on their own. This approach differs from a traditional marketing strategy where marketers seek out the consumer.
Remarketing involves the creation of personalized and targeted ads for consumers who have already visited a company’s website. The process works in this way: as users visit a brand’s website, they are tagged with cookies that follow the users, and as they land on advertising platforms where retargeting is an option (like social media platforms) they get served ads based on their navigation.
Sensory marketing describes any marketing campaign designed to appeal to the five human senses of touch, taste, smell, sight, and sound. Technologies such as artificial intelligence, virtual reality, and the Internet of Things (IoT) are enabling marketers to design fun, interactive, and immersive sensory marketing brand experiences. Long term, businesses must develop sensory marketing campaigns that are relevant and effective in eCommerce.
Services marketing originated as a separate field of study during the 1980s. Researchers realized that the unique characteristics of services required different marketing strategies to those used in the promotion of physical goods. Services marketing is a specialized branch of marketing that promotes the intangible benefits delivered by a company to create customer value.
Sustainable marketing describes how a business will invest in social and environmental initiatives as part of its marketing strategy. Also known as green marketing, it is often used to counteract public criticism around wastage, misleading advertising, and poor quality or unsafe products.
Word-of-mouth marketing is a marketing strategy skewed toward offering a great experience to existing customers and incentivizing them to share it with other potential customers. That is one of the most effective forms of marketing as it enables a company to gain traction based on existing customers’ referrals. When repeat customers become a key enabler for the brand this is one of the best organic and sustainable growth marketing strategies.
360 marketing is a marketing campaign that utilizes all available mediums, channels, and consumer touchpoints. 360 marketing requires the business to maintain a consistent presence across multiple online and offline channels. This ensures it does not miss potentially lucrative customer segments. By its very nature, 360 marketing describes any number of different marketing strategies. However, a broad and holistic marketing strategy should incorporate a website, SEO, PPC, email marketing, social media, public relations, in-store relations, and traditional forms of advertising such as television.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
