Introduction 

According to a report by McKinsey & Company, the accelerated pace of digital transformation is reshaping traditional marketing models, emphasizing the need for businesses to adopt forward-thinking strategies. The report underscores that in this era of rapid change, organizations must shift from reactive approaches to proactive, future-focused initiatives to stay ahead of curve. 

In the context of this dynamic environment, our exploration centers on a fundamental metric that acts as a compass for businesses navigating the digital seas: Customer Lifetime Value (CLV). Beyond the immediate gains of individual transactions, CLV embodies the long-term value a customer brings to a business—a key factor in crafting marketing strategies that resonate with the pulse of tomorrow 

Definition 

Customer lifetime value (CLV) is the total revenue or profit generated by a customer over the entire course of their relationship with your business. It’s a metric to measure the total amount of money a software buyer has spent (or is expected to spend) on your products and services throughout their lifetime as a customer. The higher the CLV, the more valuable a buyer is to your business, as they would generate more revenue and are more likely to be loyal. 

Importance of CLV in marketing strategies, customer relationship management, and business sustainability. 

In modern marketing, where digital footprints and online interactions paint a complex decoration of consumer engagement, the compass guiding businesses toward sustainable success is Customer Lifetime Value (CLV). The strategic deployment of CLV does not only shapes effective marketing strategies but becomes the cornerstone of astute customer relationship management and ensures the long-term sustainability of the entire business ecosystem. 

According to a comprehensive study by Reichheld and Sasser published in the Harvard Business Review, acquiring a new customer can be anywhere from five to 25 times more expensive than retaining an existing one1. This illuminates the critical role that CLV plays in marketing strategies — it directs the focus from incessant customer acquisition to nurturing and retaining the existing customer base. In the digital era, where consumer loyalty is a mercurial commodity, understanding the lifetime value of a customer becomes a strategic imperative. 

Customer lifetime value isn’t merely a metric confined to marketing departments; it permeates the realms of customer relationship management. The Journal of Relationship Marketing emphasizes the symbiotic relationship between customer lifetime value and customer satisfaction, asserting that a deeper understanding of customer lifetime value allows businesses to tailor their interactions, ensuring a positive customer experience that resonates across the entire lifecycle. 

Moreover, the significance of customer lifetime value extends beyond immediate transactions, casting a long shadow over the sustainability of a business. A report by Bain & Company emphasizes that businesses with a higher customer lifetime value not only weather economic downturns more resiliently but also have the financial stamina to invest in innovation and quality, fostering a cycle of sustained growth3. 

In essence, customer lifetime value emerges as the North Star, guiding businesses through the intricacies of marketing dynamics, shaping customer relationships, and fortifying the foundations of long-term business sustainability. 

 How to use Customer Lifetime Value in marketing 

Once you know the Customer Lifetime Value for your business, it can be applied in a wide range of different ways to empower your larger efforts – particularly when it comes to your marketing. 

1. Knowing your customers

Customer lifetime value gives a lot of insight into who your customers are, what they want, and what they need in ways that aren’t immediately obvious. If your customer acquisition costs are always going up (and thus your customer lifetime value is decreasing), it means something you’re doing isn’t working. Maybe your ad copy isn’t as effective as you think it is, or you’re spending money on the wrong channels. Either way, adjustments need to be made. It isn’t enough to just calculate, you also need to be willing to act on it.  

Likewise, if your acquisition customer lifetime value costs are going down, but customer lifetime value is going up – either due to an increase in average value per purchase or through more purchases being made in a year – that means you’re objectively on the right path. 

2. Personalize your marketing

This type of insight is derived from customer lifetime value calculations and can also be used to generate more personalized marketing campaigns than ever before. Again, you’re talking about a metric that is based on objective fact – you know how much money people are spending, and you know how often they’re spending it. If they are satisfied, and if you’re reaching them with the right advertising message at the right time, those numbers should be going up. 

3. Measure your Return on Investment (ROI)

Speaking of return on investment, keeping a close eye on your customer’s lifetime value will also help tremendously to that end. Solid data collection, coupled with a careful analysis of factors like those outlined above, sheds invaluable insight into the effectiveness of your marketing efforts. 

If you’re spending 500 euros to acquire a new customer who only spends 100 euros on a single purchase and then never makes a repeat visit to your storefront, you’re losing money, and you won’t stay in business for very long. As your marketing efforts continue to gel with audiences, the amount of money you spend to acquire a new customer should be going down while the average amount they’re spending should be going up. If that isn’t true, something is wrong – end of story. 

If your customer’s lifetime value is always ticking down, it means that your current advertising efforts are not as effective as you think they are. This doesn’t necessarily mean they’re of poor quality – it means that audiences are not responding to them in the way that they need to be. Changes need to be made, and positive changes will be reflected in a customer’s lifetime value that continues to increase once again. 

This also underlines the importance of having a customer data platform at your side. It helps make sure that your customer’s lifetime value is being calculated using accurate, actionable data that you can then use to make the most informed decisions possible moving forward. In addition, organizations who utilize a customer data platform often grow at a rate of 9 times higher per year than those who do not. They also see a year-over-year revenue growth that is 3 times higher, too. 

4. Increase customer lifetime value over time

In the end, it’s important to understand that customer lifetime value can give you a “bird’s eye view” of not just your advertising, but the effectiveness of your entire business as well. For example, think of all the potential sources for new customers and repeat purchases you aren’t paying for. 

You acquire one new customer, and they’re so satisfied that they tell a friend, who in turn makes a purchase. That new customer came from word-of-mouth, which cost you nothing. Or one new customer is so satisfied that they immediately make three more purchases. Your advertising generated the first sales – the quality of your products and services were responsible for the rest. Both examples would still get factored into your larger customer lifetime value equation. 

Conclusion 

To conclude, Customer lifetime value is a great metric to use to spot early signs of attrition and combating them. Let’s say you notice that customer lifetime value is dropping, and pinpoint that customers are neglecting to sign up for a continuation of an ongoing subscription of your product or service. You might decide to launch or improve a loyalty program to tempt customers back or provide better customer support or marketing efforts around renewal times to help encourage customers to sign up again. This will help to increase customer lifetime value and business revenue again. In order words the best customers will have a higher customer lifetime value, and through careful analysis you’ll be able to understand the commonalities between these individuals. What drives them to buy into your brand again and again? Is it a common need, a particular income bracket, a specific geographical location which will help define customer segment based on this higher value of the existing customer. 

 Source 

McKinsey & Company. (2021). Reimagining marketing for the next normal. Retrieved from https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/reimagining-marketing-for-the-next-normal 

What is Customer Lifetime Value (CLV), and How to Calculate It (gartner.com) 

Reichheld, F. F., & Sasser, W. E. (1990). Zero defections: Quality comes to services. Harvard Business Review, 68(5), 105–111. ↩ 

Gupta, S., Lehmann, D. R., & Stuart, J. A. (2004). Valuing customers. Journal of Relationship Marketing, 3(1), 7–27. doi:10.1300/J366v03n01_02 ↩ 

Bain & Company. (2019). Customer Lifetime Value: A Strategic Measurement for B2B and B2C Businesses. Retrieved from https://www.bain.com/insights/customer-lifetime-value-a-strategic-measurement-for-b2b-and-b2c-businesses/ 

What is customer lifetime value and how is it used in marketing? | Lytic 

What is Customer Lifetime Value (CLV) ? | Qualtrics