Join Drew Boyd for an in-depth discussion in this video Calculating customer lifetime value, part of Marketing Foundations.
Imagine a hypothetical scenario where you're forced to make a choice between acquiring two customers, which one would you choose? Well, it depends on how much they buy from you, if she spends more money on your products than he does, you'd select her. But wait a minute. What if she costs you more in terms of selling and customer service? She may spend more, but you actually earn less on her than on him. So then you would switch because the net profit is higher.
But hold on again. There's one more factor you have to consider. You make less profit on her, but what if you expect to retain her for a longer period of time than you retain him? You make more profit on one sale from him, but if you can continue selling to this lady for the next ten years, then you'll do much better. The way you make this type of decision in reality is with a tool called Customer Lifetime Value, or CLV for short.
CLV is the formula that helps the marketing manager arrive at the dollar value associated with the long term relationship with any given customer. It tells you just how much a customer relationship is worth over a period of time. Now, there are various formulas to calculate CLV, and some are more complex than others. The simplest way to estimate lifetime value for a typical customer is the following equation, unit selling price minus your variable costs times the number of repeat purchases per year times the average retention time in years.
Let's do an example. Imagine you're selling men's wallets. Your wallet sells for $89 and it costs you $29 to make and sell it. The typical customer buys a new wallet every three years. And you expect to retain him for an average of 20 years. The CLV formula gives us $89 minus $29 times 0.333 times 20 years equals a CLV of $400. So what? Well, calculating the CLV helps in several ways. First, it tells us that we wouldn't want to spend any more than $400 acquiring and retaining any one customer. Spending more than that, and we start losing money. It also helps you decide which customers are more valuable to acquire and retain. Like our example earlier. CLV encourages marketers to focus on the long term value of customers instead of investing resources in customers of lower value. And it makes you sensitive to how much you're spending on acquiring and retaining customers and whether it's effective
You'll also learn to address tactical challenges and present the plan to get buy-in throughout an organization, from the C-suite to the sales team, as well as use the marketing plan to guide outside agencies and vendors. Finally, you'll learn how to launch the campaign and measure its performance.
- Marketing in an organization
- Assembling the team
- Creating the marketing plan
- Analyzing your products, customers, and market
- Segmenting customers
- Creating a value proposition
- Developing a strategy
- Setting goals
- Setting prices
- Using social media
- Presenting your plan to leadership
- Budgeting your plan
- Measuring success