Why it is important to calculate your CLV
There are many marketing metrics related to finances — for example, ROMI. Why do you need another one, especially with such a convoluted formula? Let’s find out.
It affects your revenue
The more money one customer brings you, the higher your revenue is. That’s why LTV is connected with revenue — you can use it to predict the total profits of your company over the next month, quarter, or year.
The general CLV formula shows the value of your average customer regardless of demographic characteristics, behavior or acquisition channel. That’s why you can use it only for approximate revenue forecasts. For more precise numbers, divide your customers into groups and calculate the LTV for each segment.
It helps you boost customer loyalty and retention
CLV is the metric that depends on how long your customers stay with you and how much and how often they buy from you. But it doesn’t just show the “quality” of your customers — it shows the “quality” of your business.
If you noticed a sudden drop in CLV, the fault may not be in your customers but in your marketing strategy. In this case, you can dig deeper and look at which components of the LTV formula have changed and resolve issues. For example, if the churn rate has increased, reconsider your retention campaigns. And if the average check is lower than last quarter, sending some promotional emails to boost sales wouldn’t hurt!
It helps you target your perfect customers
Where do your most valuable customers come from? No other metric can give you an answer but LTV.
For example, if you track this metric, you might find out that PPC ads bring you more new people than emails but they mostly stay for one-time purchases, therefore, their LTV is lower. Should you keep spending your marketing budget on this channel? No, investing into the channel that brings you more long-term customers is more reasonable.
It reduces CAC
CAC stands for Customer Acquisition Cost, which is how much it costs your business to earn one new customer. And LTV shows how much money an average customer brings you. The thing is, these metrics are closely connected with each other.
CAC by itself doesn’t mean a lot — but tracking the CAC/CLV ratio is vital for every business, big or small. The absolute acquisition cost can be as large as you can afford but it shouldn’t be above the average “value” of a customer. Calculating CLV helps you make wiser financial decisions and start spending less on customer acquisition before you’re broke.
