Do you know what each of your customers is really worth?
CLV, also known as LTV (Lifetime Value) or CLTV (Customer Lifetime Value), measures the Customer's Lifetime Value to a merchant. CLV is one of the biggest predictors of retail success, and also one of the most overlooked by marketers. It’s defined as the total dollars flowing from a customer over the entire relationship with that customer.
Here's a simple example with a customer that has made multiple purchases over a period of time.
Aug 2012: $ 50 Feb 2013: $ 55 Mar 2014: $ 65 ============== CLV: $170
One could say this customer has a Customer Lifetime Value of $170, or a CLV of $170. Often, marketers will try to box in CLV to a time period to create some consistency. We have many retail clients who look at the Lifetime Value of a customer as a 3-year metric. In this case, let's say the time period is Jan 2012 to Dec 2014, so this customer has a 3 Year CLV of $170.
Most retailers measure CLV in total dollars (or Pounds, Rupees, etc.) spent by the customer over their complete relationship with the retailer, from first to last purchase. However, it is also important to consider COGS (Cost of Goods Sold), Acquisition cost, Retention cost, and other expenses. There are a number ways to think about CLV:
Actual CLV, or Total Spend: This is the amount the customer has spent historically with the retailer, to-date, measuring total revenue from the customer (not profit).
Predicted CLV, or Forecast Spend: this is the total amount that the retailer predicts a given customer will spend over their relationship, from first to last purchase.
Net CLV is the Actual CLV minus the cost of customer acquisition.
Customer Lifetime Profit (CLP) is the total profit made from the customer over their lifetime, after accounting for all expenses, including acquisition, retention, cost of goods sold, and other.
Windsor Circle automatically calculates and updates the Actual CLV data (called the "WC_Monetary_Actual" field) on a nightly basis, importing the value for every customer into the retailer's email marketing software. This allows a retailer to power triggered email campaigns around spending thresholds, for example, a special reward that gets sent to every customer who reaches $500 in total spend.
Windsor Circle uses RFM (Recency, Frequency, Monetary analysis) to predict a customer's lifetime value going forward. An RFM score of 111 (which means the customer is in the top quartile for both recency of purchase, frequency of purchases, and total monetary value of past purchases) indicates that the customer is highly likely to be the retailer's most valuable customers in the future.
Windsor Circle's Retention Analytics suite includes a number of CLV reports:
Benefits of analyzing Customer Lifetime Value:
If you discover that the 3 year CLV of a customer who buys a certain product (like ski boots, for example) is $300, then the $170 about 18 months into a relationship as shown above would appear to be on pace. If the 3 year CLV of a customer was actually more like $1000, and you were at $170, then you've got a problem.
You may also discover that the CLV associated with customers acquired from one Source (call it Adwords) is different than another Source (perhaps a direct mailing). This can guide future acquisition spend.
You will also see differences in CLV between segments. For example, many retailers we work with see a substantial jump in CLV from customers who have made 2 purchases to those who have made 3. This can inform your retention strategy, which could include a more strategic post-purchase email series that gets triggered after the 2nd purchase to drive more customers to make their 3rd, perhaps using escalting offers over time, or a special gift. CLV data can help you decide if, and when, it is worth going the extra mile, by helping you project a bigger future payoff.
CLV and Profitability
Another critical dimension to CLV is profitability. Let's take the example of a merchant with avg 3-year CLV of $300, with customers making an avg of 2 purchases per year, at $50 AOV (Average Order Value). Here's the purchase path:
In this simple example, the merchant has not made a profit until the customer makes their 4th purchase. And on a CLV of $300, the Net Lifetime Profit is $25 total after COGS, acquisition and retention costs.
At this point, the merchant would need to subtract operating (all other) costs. Let's say there are 100,000 customers, and the business incurs an additional $500,000 in operating costs. This is $5 per customer, so the final earnings is $20 per customer. Note that the retailer essentially breaks even, when including operating costs, at the 4th purchase. So any customer acquired and not retained through at least the 4th purchase has essentially lost the company money.
CLV is a valuable indicator for many reasons. Windsor Circle's software automatically calculates and reports on CLV by segment, time frame, product, acquisition source, and more. Additionally, we make it easy to act on these insights by providing CLV data and scores directly in a merchant's email marketing software.
Contact a member of our team to start turning your customer data into actionable data-driven email marketing strategies today.