Let’s face it. When it comes to profitability, some customers are worth more than others. That’s why, before deploying any marketing plan, you need to know who your most profitable customers are.
Understanding Customer Lifetime Value (CLV), or how much a customer is worth over time, is a critical part of the equation. One customer may spend $250 with you initially, but then never order again. Another customer may order only $150 the first time, but then become a loyal (and far more profitable) customer who orders thousands of dollars’ worth of products over time.
This is why in order to understand the true profitability of your customers, you need to look at campaigns from a broader perspective. If you were to look at the ROI of the above campaign in the short term, you would think the first customer netted the highest ROI. But it was the second who was the most profitable.
How do you determine CLV?
First, you need to decide which measure (or measures) you are going to use.
- Do you want to determine CLV based on revenue generated?
- Or profitability?
- Do you want to include hard dollar values only?
- How about the frequency of purchases? Is having consistent, predictable revenue streams more critical than larger, less consistent ones?
- How important are other factors, such as social media influence, to your calculations?
You also want to consider your customer acquisition cost (CAC). If you use static direct mail combined with generic email, you may spend less but net fewer customers. Or you can run a short-run, highly targeted campaign that costs more overall, but acquires more customers and has a lower CAC that results in a higher CLV.
Customer Lifetime Value is an important calculation, but its value to your marketing strategy depends on the accuracy of the numbers you put in. Talk to us about creating accurate CLVs for your customers.