AnalyticsAnalyzing Customer DataA Brief Intro To CLV (And Why You Should Measure It)

A Brief Intro To CLV (And Why You Should Measure It)

Customer lifetime value (CLV) is one of the most misunderstood or ignored concepts in marketing. But if given careful thought, it's a concept that will totally transform customer perception and sales.

There’s no single perfect metric for understanding your users, but the one that comes closest is customer lifetime value (CLV). If you’re new to the concept, CLV is the present value of the future cash flows attributed to the customer during their entire relationship with the company, according to the Marketing Accountability Standards Board (MASB).

It seems simple enough, but CLV is one of the most misunderstood or ignored concepts in marketing because it’s inherently a long view, and our industry has suffered from shorter and shorter term tactical thinking as we rush from campaign to campaign. To adopt CLV is ultimately to take a more strategic method of measurement because it’s considering the future, not simply tracking results of the past. Understanding CLV will debunk the old myth that it’s more expensive to acquire new users than keep old ones. Of course you want to keep (most of) your old customers – no one wants to lose customers – but understanding which are the most valuable is what’s truly important, not just in keeping loyal customers, but finding more like them.

counting-money

Businesses small and large benefit from measuring customer lifetime value, and yet in both cases we come across examples where CLV is not considered. Peter Shankman illustrates a situation where ignoring CLV can be costly in “Would You Lose a Customer Over Seven Cents?”. It’s an anecdotal piece about the author’s experience with a deli that he visits frequently for lunch, where once, he was short seven cents. The restaurant was inflexible on an insignificant cost which succeeded in doing nothing but frustrating Peter. They were thinking about the importance of following policy rather than the happiness of someone valuable to them. It’s easy to fall into that line of thinking because it’s typically part of a process, but if the person serving Peter was trained to understand the lifetime value of special customers and sometimes break policies for them where it makes sense, the server would have clearly let the seven cents slide.

Peter then shared his experience on his blog (he was nice and protected the name of the restaurant – most people would not), proving that not only is valuing your customers important to increasing long term growth, it can also generate PR for you. Whether that’s positive or negative is up to businesses, but I can guarantee the ones that understand and value CLV (Amazon, for example) are going to generate warm feelings and reactions from customers.

CLV also helps solve the question for your organization of what types of users will be the most valuable over a continuum as opposed to ones that purely spend money today. For example, a flash sale might generate value-oriented customers and revenue today, but few may ever make a purchase again. Some research even says this could hurt you. Instead of a flash sale, perhaps the right seasonal offer actually brings in repeat customers that aren’t purely interested in discounts.

In a world with greater and greater choice, finding the best customers, keeping them happy and understanding their value is vital success in the long term.

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