I’m going to be talking to you about what is customer lifetime value or CLV. What is it? And when should it be used?
To find out more, check out my video below or keep reading for the full blog.
I get a lot of customers approaching myself or my agency for various digital marketing requirements. Such as Google ads, search engine optimization, building funnels, and so on. Sometimes they say to me, they want the cost per acquisition to be x.
But let’s have you taken your CLV into account. And when I say that they’re like, what, what are you talking about? So this is where it’s great having a KPI. Like what you are, you are a way to be, or what you want your cost per acquisition to be, or so on, right. But it’s also equally as important to take your CLV into account. Now, what this CLV essentially is, what are you likely to profit from the customer during the customer’s lifetime value.
I’ll talk you through it so you can better understand what CLV is. How it can be used as an integral part of deciding what your real KPIs should be when implementing a marketing campaign.
Let’s say for example if you’re doing a marketing campaign on let’s say, Google, for example, right? And you spent 500 pounds on the various campaign. You’ve won four customers with this Google ad campaign. That means that your cost per acquisition, your CPA, is $125.
That’s simply $500 divided by the number of conversions that you’ve won, which is $125. Right? So this is where the customer lifetime value comes in. So customer lifetime value. I want to keep it really simple there, this can get quite complicated. And there are so many different ways of calculating what your CLV should be.
But for the sake of this argument, this exercise, I want to keep it super simple. So you can understand what it is. You can implement it within your business pretty much straight away. So the formula for a CLV is, look at the profit per year or the lifetime value of your customer.
You multiply that by the average duration of how long that customer is likely to stay with you. And then you minus your cost per acquisition. You would minus $125. So your profit per year, if servicing that customer costs you $1,000, right, and you chose the customer $3,000.
So that essentially means that your profit is $2,000. Here, okay, so now let’s assume your average duration for each customer is around about two and a half year, that’s 2.5 years. Obviously, you will have statistics, and you will know that each customer, how long do they typically stay with your business. You take that into account, then you take into account your cost per acquisition, that means that your profit is $2,000. Multiply that by 2.5 years and 2.5 years is. In this case, you’ve said that this is how long a customer typically stays with you for you minus your cost per acquisition. Which is $125 and that then brings you to a CSV of $4,875. But in this way, you now you can see that within your campaign.
So if you acquire a customer, and that customer has taken you $125 to acquire here. It means that during the lifetime of that customer, you’re like in this case, to make $4,875 that looks like quite a good return on investment to me.
Even if you don’t break even it doesn’t matter. Because we know that this customer is likely to stay with us for two and a half years. You know looking at your historical records, and if this customer does stay with us for two and a half years. We got likely to get a profit of $4,875 for this customer.
You understand your CLV. Right. And that means that you can better understand what your cost per acquisition should be. So not panic just because you haven’t broken even right on the first month or the first week. But it also then helps you to better implement strategies within your business for various things. Like what type of upsells can we do to our customers? Or even down cells that say, during the lifetime of their business? How can we get this customer to stay with us for a longer period of time? In other words, how can we increase customer retention?
By looking at these figures, our average duration is about two and a half years. But if we can service the customer better, or find out why customers are leaving us in the first place? We might want to extend that to three years, or three and a half years. Hence, the reason this is a very simple blog, to help you to understand what customer lifetime value is. How you can calculate it really simply and implement it as an integral part of your KPI.
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