Customer lifetime value is a metric that shows you how much a customer is worth over a lifetime.
Many companies focus on the first sale, as much as 95% of them. This forces the business to think short term and so they don’t invest the right amount of marketing budget.
The other, smart 5% of companies factor their customer lifetime value before they decide on their marketing budget. This not only shows the customer revenue in the long-term, but also allows the company to become a leader in their space.
This is best explained with an example of you selling shaving cream for $12.
If 15% is the average cost of marketing, most businesses would want to have a marketing cost of $1.80 to get one buyer of the shaving cream (15% of $12 is $1.80)
But if you’re the smart business owner, you’d say let’s first check to see the CLTV (customer lifetime value) of the customer. And this is your boardroom conversation…
On average, a man shaves 15 times a month. The tube of shaving cream runs out after 30 uses. This means, as long as the customer likes the shaving cream, he will return to buy another tube in 2 months.
And on average, it seems our customers order at least 6 times.
This means, during the lifetime of a customer, he buys shaving cream 6 times results in revenue of $72.
This is all oversimplified of course, but the exercise results in CLTV of $72.
Now, 15% of $72 is $10.80. You suddenly increased your marketing budget per customer almost tenfold!
Now, you’re the king of the jungle. You’re willing to pay a lot more than your competing shaving cream brand. And so on the digital marketing landscape, you spend more, win more auctions and thereby show your ads to more susceptible buyers.
And there you have it. The power of CLTV.
By the way, the above example doesn’t take into account a couple other things for simplicity’s sake; a customer can also refer you more customers. And, the same customer can also buy other products of yours (that you upsell). These tie into the CLTV as well.