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Customer Lifetime Value: The Most Important ROI Calculation You Will Ever Use

Customer Lifetime Value (CLV) is one of those buzz terms that make you go – huh? But, it doesn’t have to be!

It’s one of the most important measurement tools you will ever use and while it seems scary, it really is pretty easy. In basic terms, it determines which marketing channels deliver most valuable customers and takes the guesswork out of allocation of your marketing dollars.

It’s very easy for us to consider a marketing campaign an immediate success or failure. How many times have we heard (or said) “We didn’t get anything from that campaign, I have not had one customer tell me they saw it” or “We had 25 potential customers call after we sent out that postcard, what a success!”

The answer is probably “lots,” but do we truly know the value of what did or did not come out of our campaigns six months, a year or three years after the campaign was complete?

CLV has great appeal as a marketing concept, because, in theory, it represents exactly how much each customer is worth in dollars and exactly how much a company should be willing to spend to acquire each customer, especially in direct marketing efforts.

It will show you the most effective technique and how much to invest in good customers. Increasing your customer satisfaction will boost your CLV and in the end be worth the efforts. This calculation will help you make informed prospecting decisions and make that dreaded budget conversation with your president much easier when you can show them the hard numbers.

Here is a simple formula:

(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)

A simple example would be the lifetime value of a customer who spends $200 every month for three years. The value of that customer would be:

$200 X 12 months X 3 years = $7,200 in total revenue (or $2,400 per year)

Marketing doesn’t just have to be about branding anymore and shouldn’t be hard to measure. You can tie it naturally into sales numbers making your campaign a true sales AND marketing – not sales OR marketing – effort.

You will find that marching together toward the same goal is going to be a lot more effective and efficient. CLV is a great first step to get where you’re going.