Customer Lifetime Value and Why it Matters

You’ve heard about CLV. But what is it, how can you calculate it, and why does it matter? Mailchimp’s tools and resources will help you get started.

What is CLV (Customer Lifetime Value)?

CLV is the amount of money a customer is predicted to spend with your business for the duration of your relationship with that individual. It’s an important metric, and the way you approach it can both define your business and could vary significantly depending on what you’re trying to get from your business.

More than just a simple exchange of goods for money, CLV is a measurement of how valuable a customer is to your business over time. Of course, not all customers are valued equally. And because it’s less expensive to keep existing customers than it is to find new ones, keeping your CLV high can be essential to the success of your business. After all, a higher CLV means that you have more loyal customers.

How to calculate CLV

So, how do you measure CLV? You can estimate your Customer Lifetime Value with the following steps:

  • Forecast a customer’s lifecycle with your business
  • Estimate future products purchased to forecast future revenues
  • Estimate the costs associated with producing and delivering future products
  • Calculate the current value of those revenue amounts

While the process can seem intimidating, breaking it down into manageable steps can help.

A step by step guide to calculating customer lifetime value

In order to determine your CLV, you’ll need a few things:

  • Average purchase value: Divide your company’s total revenue in a time period by the number of purchases in that same period.
  • Average purchase frequency rate: This represents the average amount of orders from each customer.
  • Customer value: Determine this number by multiplying your first two calculations: average purchase and average purchase frequency.
  • Customer lifespan: This is the length of time a customer relationship typically lasts before that customer disengages from your business.
  • Forecast revenue: Using the information you’ve determined in the first 4 steps, you can estimate how much revenue you can expect from an average customer. Simply multiply the customer value by the average customer lifespan.

For a real-life example, try this Starbucks case study. From Neil Patel Digital:

“It’s no secret that Starbucks’ acquisition strategy is closely scrutinized and routinely copied. Using rough sales figures from 2004, we’re able to estimate the CLV of an average Starbucks customer.”

Why CLV is important to your business

Customer Lifetime Value determines the financial value of each of your customers. In and of itself, that’s an important purpose. But CLV is also unique in that it can look forward, as opposed to a concept like customer profitability, which measures past activities in order to gain insights. Much like you should always be looking into the future to determine which products you should sell, various ways you can optimize your business, and how you might serve your customers better, CLV can forecast future activity to improve your bottom line.

So, what can you do with Customer Lifetime Value? And why should you care?

Advantages of CLV

Specific advantages of understanding Customer Lifetime Value include:

  • CLV allows you to measure the financial impact of marketing campaigns, initiatives, and other activities.
  • That, in turn, will help your company align and ladder up to bigger financial targets in an organization—or start creating them if you’re a smaller operation.
  • CLV can also change the way you think about marketing in terms of creating loyalty objectives or focusing spend on underutilized areas.
  • CLV will help you find balance in terms of short-term and long-term marketing goals and demonstrate a better understanding of financial return on your investments.
  • CLV encourages better decision making by teaching marketers to spend less time acquiring customers with lower value.
  • And the bottom line? Effective management of your customers relationships, which leads to increased profitability—that’s perhaps the most obvious advantage of Customer Lifetime Value.

In summary, there are plenty of reasons why you should learn more about Customer Lifetime Value. When you consider the fact that it represents the literal value of a customer, it only makes sense to devote marketing spend toward implementing it.

Why customer lifetime value matters

Great question! Adroll President Scott Gifis lists CLV as one of his most important 3 “quick-win tips” to improving retention:

“Optimize your customer lifetime value (CLV). By doing this, you may realize that you’re spending huge sums on acquiring customers because you haven’t made enough of an investment in your loyalty programs. For example, if your customer acquisition cost (CAC) for a net-new customer is 30% of your first sale, then it makes sense to provide discounts and promotions to your past customers at 10-20%. You’ll need to think differently about how you measure and attribute various programs. Vanity advertising metrics and surface-level attribution models, such as last-click, need to be replaced with more comprehensive forms of measurement. It’s vital to make an investment in truly understanding your CLV and separate out the cost per acquisition (CPA) for new and repeat customers. You’ll probably find that you’re burning a lot of dollars that you could be sharing with your customers via loyalty programs, and driving faster, more sustainable growth.”

Here are some more reasons why Customer Lifetime Value matters:

  • Helping to determine customer segmentation
  • Measurement of customer loyalty
  • Determining efficacy of marketing strategies
  • Aiding in judgment of product quality
  • Increasing profitability overall

Or, as Business.com writes, “CLV can safely be called the most complete metric for analytics. New customer rates, costs per order, customer retention rates, conversion percentages and many more are important to your future revenue, but CLV combines all the important statistics of every individual customer. It is simply the expected profit you get from each customer in your business. With proper calculations, you can easily grow your e-commerce business with this metric. You won't be losing money, because you will know exactly how much you earn.”

They’ve even got 7 more reasons why CLV can change your business.

Some common customer lifetime value mistakes

Of course, Customer Lifetime Value isn’t a magical cure-all. Used improperly, CLV can actually waste time and money—which is the opposite of its intended purpose. There are a number of common mistakes marketers make when experimenting with CLV. Keep these in mind as you begin your work:

  • Misalignment with company goals: According to Directade, “Start by getting clarity on those goals and get buy-in from the top of the org. Then, using your [CLV] model, develop a media plan with CPO Allowables that support those goals. Whether your objectives are growth or profit, your [CLV] model can be built with this in mind. Doing so correctly can avoid surprises down the road.”
  • Segment inaccuracy: “At the heart of customer segmentation is the belief that all customers are not created equal and that understanding the differences among customer segments is key to effectively acquiring and retaining customers,” entrepreneur Adam Toporek explains. “Depending on the nature of the business, customer segmentation can require some serious mathematical analysis to be done properly.”
  • Choosing an unrealistic number for your customer’s lifetime: Tradecraft writes about a common pitfall: “As a startup, you may not know your true customer lifetime. It may be continually changing as your product changes, so to calculate your LTV, you’ll have to guess. The initial number you decide on isn’t actually that important, since you can reevaluate it as more data comes in. The most important thing is that you pick a reasonable number.”
  • Neglecting to factor in flexibility over time: As the Harvard Business Review writes, “Keep customers who show a positive NPV for the marketing investment, the rules say, and drop the ones who don’t. Those are rational choices at the time of the calculation—but only then. The conventional calculation is thus rather static and actually flawed, because you are not able to factor in a company’s flexibility to cut a given customer loose at any time. Flexibility means options, and options have value.”

Improving customer lifetime value

Now that you know what CLV is, how to calculate it, why it matters, and some of the common mistakes that marketers make while working with it, it’s time to improve on it. We’ll go over 3 tactics below, but these are only a start. Like any other marketing effort, you should iterate as you go, learning more about your audience and improving the process along the way.

Improving your onboarding process

“When it comes to customer success,” Retently writes, “onboarding is the process you should spare no effort on in order to ensure sustainable business growth.” In fact, they name onboarding as one of their 12 proven tactics for increasing your CLV. Others include building relationships, offering high-end customer service, and increasing your pricing. But they put onboarding in the #1 spot. Here’s more on why:

“Focus on communicating the value of your offering right from the start. Test onboarding approaches and monitor the customer health score based on their behavior. Whatever option you go for, make sure it is straightforward enough to be understood and encourage engagement.”

Making your customers feel special

Once you’ve onboarded new customers, it’s time to show them value. Many of Neil Patel’s 10 tactics for increasing your customer lifetime value and loyalty focus on making customers feel special. He writes that “brand loyalty is one of the most difficult assets for a business to attain. Or, at least it was. We used to have to rely on customers having a great experience with our product/service, or with our employees. Now, we can give them a great experience, but most businesses still haven’t figured out how to do it.”

From featuring fans in your content, to surprising customers with “something they didn’t know they wanted” in the mail to helping customers do something they love, his key to increasing CLV is a focus on the people who support your brand.

Focusing on sales

Now that your customers understand how much you value them, it’s time to take a look at your sales. There are a few ways to optimize them, according to this Entrepreneur piece on increasing Customer Lifetime Value and boosting profits: increase sales per order, increase sales over time, and reduce costs to serve customers.

These are they “three key strategies your business can use to increase customer lifetime value (CLV),” Entrepreneur writes. “If you don’t pursue one or more of these strategies, it’s unlikely that you’ll see a big uptick in customer retention or customer loyalty toward your brand anytime soon.”

Does Mailchimp offer CLV insights?

In fact, we do. For eligible accounts with a connected store, Mailchimp can provide marketers with actionable predictions about future purchase behavior, using predictive modeling and past purchase data from your store. Built specifically for marketers, these insights can be used to quickly target messages to segments based on how likely customers are to buy from you again, and how much value they’re likely to bring your business over time.

Even better? You don’t need to hire a data scientist or do any math on your end. Mailchimp automatically provides a breakdown of customers in your audience based on 2 types of predictive insights:

Customer lifetime value: See an overview of your customers, broken down by how much value they’re likely to bring your store over time. We factor in spend amount, purchase frequency, length of time someone has been a customer, and more. And we use this information to categorize contacts into segments based on estimates about highest (and lowest) amount of value over time. For accounts with enough purchase data to calculate CLV, this information is accessible right in your audience dashboard, with segments you can instantly target campaigns to—so you can thank your most high-value customers in just a few clicks.

Learn more about customer lifetime value insights in Mailchimp.

Purchase likelihood: Mailchimp accounts with access to customer lifetime value will also see a breakdown of existing customers based on how likely they are to purchase from your store again. Using factors like how long someone’s been a customer, how frequently they purchase, and more, we show you segments of your contacts based on how likely they are to come back to buy. You can use these clickable segments in your audience dashboard to market to these customers however you need to. One example: reaching customers who may only be ‘moderately’ likely to come back and enticing them with a special offer.

Learn more about purchase likelihood insights in Mailchimp.

Both purchase likelihood and customer lifetime value can be used as segmentation criteria in Mailchimp, so you can filter contacts based on these insights and others. And when you do that, it becomes easy to create custom segments—and find exactly who you want to market to.

Ready to see what else you can do with your customer data in Mailchimp? Learn how our Marketing CRM tools can help you learn more about your customers and quickly target messages to specific segments of your audience—all from one dashboard.