Customer Lifetime Value (CLV ) has been called “the most important metric for understanding your business.” But understanding exactly how to leverage CLV into a revenue-generating machine isn’t always easy. What is CLV? Why is it more important now than ever before? What can you do to improve it?
We’ve collected the best Customer Lifetime Value data visualizations to give insight into the relatively simple – and actionable – steps you can take to increase CLV.
What Is Customer Lifetime Value?
CLV is both a formula and the foundation for a strategy to increase ROI and sustain growth, but its shortest definition is: The revenue earned from a single customer over time.
Even though maximizing CLV is the key to retaining customers, increasing revenue, and growing as a company, very few companies actually measure it.
Lifetime Value (LTV) includes Cost to Acquire a new Customer (CAC) and Churn rate (how quickly customers leave). However, most calculations fail to include cross-sells, up-sells, and the value of referrals for each customer, which increase LTV. To affect LTV, your marketing strategies should take these other factors into account as well.
CAC includes the product cost, research, development, and marketing—everything you need to convince a potential customer to buy. While the equation is simple enough – just divide the total costs of acquisition by total new customers within a specified time period – adding up every acquisition-related activity is where companies get bogged down. Every company should keep tabs on their CAC number, because if it’s higher than or equal to the CLV, the business will fail.
Why is CLV more important now than ever before?
A very interesting series of graphs from RJMetrics looks at the value of repeat business, which is more important now because so many companies (SaaS, specifically) rely on it. Using research from Shopify’s Ecommerce Growth Benchmark, RJMetrics found that there was a top quartile of companies who were bringing in more than $600,000 in monthly revenue and acquired 3.5x more new customers than their competition.
No coincidence. These are also companies that excelled at retaining customers early on, with 20% of their revenue coming from repeat purchases in their first few months of business – and by the end of their first three years, they see the majority of their revenue coming from repeat purchases.
Clearly, the most successful new companies are those that master customer acquisition and retention – it’s not just an acquisition game anymore. The old online retail strategy that relied on acquisition tactics isn’t enough for today’s companies looking to develop sustainable growth. Retention strategies are equally important, as are strategies that encourage repeat purchases almost as soon as the first purchase goes through.
What you can do to improve CLV
- Don’t stop at the first purchase
RJMetrics found that the likelihood of a customer of a top quartile company making a second purchase was near 30%. But if they did make that second purchase, the likelihood of a third purchase rose to above 50%, and from there, additional purchases continued to rise.
2. The first 30 days count most
The majority of a new customer’s CLV during their entire first year is realized within the first month – by year three, it grows to nearly 80%. That means if you concentrate on making the customer’s first month successful, you’ll increase your chances of a good, long, profitable CLV.
3. Double down on what works to tip the odds in your favor
This data visualization presents only a few of the manys ideas for how to retain customers through effective marketing and customer success campaigns.