If you own a business then you should understand customer lifetime value (CLV) and how much power it can give you when you are making marketing budget decisions.
I didn’t go to school for business, I kind of just “fell” into it, or in-love with it, or was cursed with it. I’m not sure which is more accurate. Either way, when I discovered CLV I assumed that it was something every seasoned business owner was aware of and I was just late to the game. Through working with my clients, I’m discovering that most are don’t actually know this number or what it can mean for their business.
When I first talk to a new client, one of the things that I try to find out is what their marketing budget looks like. There’s several reasons for that, and you can read more about them here. There are several things to consider when setting your marketing budget, but a good first step is estimating the lifetime value of your customers.
What the heck is Customer Lifetime Value?
The CLV is how much revenue your average customer is estimated to bring to your business during your entire relationship with them. Not just the initial sale, but future purchases as well. By understanding this number, you’ll understand how much you can spend to get them in the door (customer acquisition) and keep them there (customer retention).
How do I figure this out?
Well, I’m glad you asked. There are a few ways to get this and some are fairly complicated. For the sake of readability, I’m going to walk you through the “restaurant napkin” approach.
Get your averages
For our simple math, let’s average things out so that we can see what a typical customer looks like financially to your business.
- Revenue per transaction- How much do they spend on average each time they buy something?
- Number of Repeat Transactions- How many times do they buy something?
- Retention- How long does your average customer stay with your business before they go elsewhere?
Example: Carl’s Lawn Care:
- Average customer spends $100 per month for lawn care.
- Average customer uses Carl for 10 months per year. (The other two they just let their grass look bad)
- Average customer uses Carl’s Lawn Care for 4 years before they find someone else to do it.
Crunch the Numbers
Using Carl’s averages as an example, the simple math looks like this: $100 x 10 x 4 = $4000. Carl’s total revenue per customer is $4000.
Let’s assume it costs Carl $30 per customer per month to run his business and maintain that customer. That’s $30-month, $300-year, or $1200 lifetime. Carl’s customer lifetime value is around $2800 (or $700 year).
What do these numbers tell us?
Knowing that Carl’s CLV is $2800 ($700 per year) means that as long as Carl spends less than $700 to get new customers, he will be profitable.
When you want to market and grow your business, this is super helpful to know. And if you are throwing marketing dollars out there without this kind of information, you are shooting blind.
Knowing his CLV, Carl can safely run a promotion for 2 months of free lawn care because he knows that he will still profit $440 that first year and $700 per year after that. Or he could budget a $3000 website design which could bring him a huge number of new customers because if it brings just one, then it will almost pay for itself. Just think, what if his website helped bring in just 10 new customers? That’s an extra $40,000 in revenue or $25,000 in profit! I believe the technical term for this kind of ROI is… awesome.
A big reason that I ask my clients questions like this is because when I work on a marketing project for them, my goal is that they see at least a 10x return on their investment. Growing my client’s businesses IS my business. Granted, like everything in business, there’s no gurantees that something will work. A good marketer knows this and should be honest about it. But with staying on top of things like customer lifetime value, you are able to minimize your risk significantly and put your marketing dollars where they count the most.
If you are interested in meeting with us to see how we can help your business grow in the digital world, contact us for a free consultation!