“Underappreciated, you say? We measure customer lifetime value, and it’s really important to us!”
Sure it’s a common metric, but why is it important to your business?
Most B2C marketers use customer lifetime value as an input to determine how much is reasonable to spend to acquire a new customer—customer acquisition cost (CAC). But for top-performing B2C companies in the world, CLV is the metric on which business decisions are made.
- It’s a faster path to revenue.
- It’s an easier path to revenue.
- For both reasons above, it’s a more profitable path to revenue.
- And, of course, it justifies increased spend on customer acquisition.
Unfortunately, even in a world where it costs five times more to acquire a new customer than it does to keep current customers, online retailers and other e-commerce businesses are continuing to invest nearly 80% of their digital marketing budgets on customer acquisition, and just 42% of businesses are currently even able to measure customer lifetime value, let alone accurately. Those two stats are more closely related than they seem at first glance.
By simply using some rough approximation of customer lifetime value to justify acquisition spend, companies are focusing on the wrong side of the equation. What they don’t realize is that investing in maximizing CLV is indeed the most profitable—and, increasingly, the fastest—path to revenue growth.
Consider, for example, that for each 1% of shoppers who return for a subsequent visit, overall revenue increases approximately 10%. That means if online retailers retained 10% more of their existing customers, they would double their revenue. Here’s another way of looking at it: Reducing your customer defection rate 5% can increase your profitability 25% to 125%.
Growing revenue by driving up customer lifetime value can also be viewed as the easiest way to do it. Though customer marketing is complex, technology is making it incredibly more manageable and effective. For example, the probability of selling to a current customer is 60-70%, on average, whereas the probability of selling to a new shopper is 5-20%… not to mention returning customers spend on average 67% more than first-time customers!
So if growing customer lifetime value is so fast and easy, why isn’t every B2C marketer talking about it?
The reality is that although increasing CLV is, for most businesses, generally a faster, easier, and more profitable path to revenue, it takes a significant shift away from the traditional marketing focus on volume and a re-focus on the quality of every customer interaction.
My point of view: Customer Lifetime Value was introduced to me early 2000 by Rust and Zeithaml. Considering the fall of long term relations and the rise of encounters lifetime value got another relevance: what’s the customer encounter (or series of encounters) worth. And even important do you measure it at an individual level or at the level of a target group.