Can you tell the difference between a typical customer in your business and someone who has the potential to become one of your best buyers? Although you probably have some idea of what makes a person valuable to your business, a lack of clarity here can cause several problems.

First of all, you may not know how to reliably find good customers. Creating a steady stream of leads and prospects for your business is already challenging, but guaranteeing that each of those new individuals is the right fit for your product or service is also difficult. When you do find those who are the right fit, it’s easier (and less costly) to market to them, convert them into customers, and make them happy so they tend to stick around and buy from you longer. The only problem? It feels as though finding people like that is a matter of getting lucky — you aren’t sure how to find them again and again so that you can grease the wheels of your customer lifecycle.

If you’re unclear on exactly how valuable different types of customers are for your business, it’s also very difficult to know just how much you should be investing in your marketing and even harder to know which channels to invest in most. On the one hand, you don’t want to miss out on the opportunity to generate new leads and customers by paying a respectable sum for a marketing campaign that works. On the other hand, you really can’t afford to throw money away on marketing that doesn’t pay for itself by bringing in valuable new leads and customers. The problem is, you can’t always tell which of these two issues you should be worried about at any given moment. Being unsure whether you are overspending or underspending can lead to a feeling of paralysis in your marketing efforts.

Confusion over which customers are most valuable also leads to one more big challenge: You’re not sure where to allocate your limited resources to best serve your customers. If you’re like most business owners, right now you probably can’t afford to do everything that’s currently on your wish list. Maybe you want to introduce innovative new systems for customer service, add more value for existing customers to boost retention, or invest in new product development, but you have to make some hard choices along the way about what to prioritize. This is especially gut-wrenching when you’re not sure which type of customer you should focus on. Not all customers are equal, and different investments of your time and resources will attract different groups. The decision-making process would be much easier if you knew who to put first.

Measuring Customer Value Can Get Complicated

Most entrepreneurs know that to tackle these problems, they need an accurate measure of CLV, or Customer Lifetime Value, but it’s not always easy to figure out what this is. According to Econsultancy’s Graham Charlton, “For companies looking to improve retention rates, customer lifetime value (CLV) is a crucial concept, but one which companies find hard to measure.”

Research by Econsultancy shows that although 76% of companies agree that CLV is an important concept for their organization, only 42% said that they were actually able to measure it. Without the ability to measure this crucial stat, many businesses also find it difficult to improve their CLV. There are several reasons why: 35% said that information silos within their company hindered their ability to increase CLV, while 34% felt that poor systems affecting the customer experience were negatively impacting CLV.

The complexity of a business’s customer information, and the scattered nature of data sources used to keep track of it, make measuring CLV a formidable challenge for most organizations.

There’s an Easier Way to Measure CLV

Finding an accurate measurement of CLV is actually much easier than it seems. The truth is, many marketers and business leaders actually overcomplicate this stat. While you may someday hire a data analyst who can pinpoint your CLV to the penny, for now all you need to get a finger on the pulse of your business is a few basic formulas.  

With a reliable understanding of both average company-wide CLV and CLV by segment, you can solve problems across your entire business, including all three of the problems mentioned above. Here’s how.

CLV SHOWS YOU COMMONALITIES BETWEEN YOUR BEST BUYERS

If you’re struggling to reliably find high-value customers, calculating CLV by segment is an absolutely non-negotiable step. To find more people who will be ideal customers, you need to find out what all of your existing ideal customers have in common. Although CLV can be calculated as an average for all of your customers, if you separate out your best buyers (those who have spent above a certain threshold, have the highest number of transactions, or have been around the longest) and find out which group has the highest CLV, you’ll know which leads and prospects to focus your energy on attracting: those who are most similar to the group with the highest CLV, which just so happens to also be the group who is most likely to refer new business to you for free. By placing the focus on your best buyers, you’ll also be earning word-of-mouth marketing.

CLV LETS YOU KNOW HOW MUCH TO INVEST IN MARKETING

Not sure how much you can safely spend on marketing? Understanding CLV gives you a reliable frame of reference. For example, if you know that on average a new customer is worth  $100 to your business over the long term, it’s probably a safe bet to spend $20 acquiring that person. However, a $20 cost per acquisition does not make sense if your average CLV is only $15. You can also divide this up according to marketing channels. For example, if it costs you $20 to acquire a customer on Facebook, but Facebook customers end up spending $200 on average, that’s a great sign. If that was the case, you would know with certainty that scaling your Facebook ad investment was the right decision.

CLV GUIDES YOU TOWARDS THE RIGHT PRODUCT AND CUSTOMER JOURNEY IMPROVEMENTS

With an accurate CLV calculation in hand, gone are the days of agonizing product or customer service compromises. Even if your resources for expanding your product or serving customers in new ways is limited, with an understanding of which customers yield the highest value for your business you can make those difficult choices with confidence. For example, say that your CLV calculations revealed that Segment A is worth three times as much to your business as Segment B. Segment A would benefit in a major way from an improvement to your customer service processes, whereas Segment B would benefit more from a change to your product’s core functionality. You only have the money to do one or the other, so which one do you choose? CLV makes the decision obvious. By prioritizing improvements that cater to your highest value segment, you can attract more people like them.

Case Studies Show That Placing the Focus on CLV Yields Results

There are many case studies showing exactly how a focus on CLV drives revenue growth. For example, IBM successfully multiplied its revenue 10x by correctly identifying its high-spending customers and marketing directly to them. SurveyMonkey identified its most profitable demographics and successfully increased its CLV by 150%. Even Netflix has used CLV to accelerate its growth. According to Kissmetrics, in the early days of Netflix its average CLV was calculated at $291. By understanding this, Netflix was able to spend more money attracting new clients to grow faster — betting that they would stick around long enough for the company to recoup those higher marketing costs. According to Neil Patel, “Because they know their lifetime value metrics well, they can keep on dumping money into marketing.” And it has paid off. Netflix is now worth $70 billion, and by focusing on CLV to an individual customer level, it has reduced its churn rate to only 9% — the lowest of any mainstream media content subscription service out there.

HERE’S EXACTLY HOW CALCULATING YOUR CLV WILL BENEFIT YOUR BUSINESS

Here are six specific ways that an accurate CLV calculation will revolutionize the way you approach business growth:

  • You’ll know exactly which of your existing customers are the most valuable so that you can narrow your focus to better serve them and find more people like them.
  • You’ll be able to understand how lifetime value varies among different segments within your business, making it easier to prioritize services for high-value segments.
  • You’ll get a clear picture of which marketing channel generates customers with the highest lifetime value so you’ll know where to focus your marketing budget for best results.
  • You’ll be able to figure out what factors lead to a higher lifetime value so that you can increase the value of all segments within your business.
  • You’ll understand the cost of acquiring one new customer in the larger context of that customer’s value over time so you can adjust your ad spend for maximum ROI.
  • You’ll know exactly which customers to focus on for the highest chances of earning a referral so that you can benefit from the power of word-of-mouth marketing.

Ready to get started calculating CLV? All you need are the formulas and some simple steps to follow. We put an easy guide together that includes all you’ll need to calculate your business’s CLV, and you can get it for free here. Whether you use our guide or another set of simple formulas, remember to put the focus on CLV in your business, and you will accelerate your growth and improve the customer experience across the board.



About Megan Monroe

Associate Editor Megan Monroe is a graduate of Santa Barbara’s Westmont College where she studied Philosophy and Communications. After working for several local small businesses (where she gained firsthand experience with the frustration of manual segmentation and follow-up), Megan joined the ONTRAPORT Growth Team. When she isn’t writing marketing copy, social media posts or educational guides for entrepreneurs, she enjoys taking advantage of the Central Coast's amazing wineries and cooking without following a recipe.