LTV infographic by Kiss Metrics
“People pay you. Not pageviews.” That pretty much says it all. (image source.)
This is as badass as it is self-explanatory. For those of you who don’t know how to estimate customer lifetime value (LTV, or CLTV), this infographic should be a pretty handy little tool. (Just ignore the Starbucks references.) Why is this important? 3 reasons:
1. When justifying an investment in a marketing program whose goal will be to acquire (create) new customers, you can sift through your customer data and determine what the average customer spend (their value to the company in terms of net revenue) should be over time. You can drill into demos or average out every customer category to arrive at a gross average – that’s up to you. This helps you set targets. If the investment is $100,000 and management expects a x10 return on their investment for a certain timeframe, you can now figure out what your net new customer target needs to be for this campaign by performing some basic 8th grade math. If the brass still isn’t sure about the value of the investment, you can make your case by projecting the lifetime value of net new customers rather than monthly, quarterly or even annual sales. For that alone, it’s a handy little set of equations
2. Good marketing is about more than customer acquisition. It also has to focus on customer development and customer retention. When making your case for a program that focuses on keeping existing customers from leaving, being able to present LTV/CLTV figures provides you with a compelling argument for the funding of such programs. (It is a lot more cost effective to develop and retain customers than to acquire new ones.) Use LTV to model for management what breaks in the conversion chain will cost the company in lost revenue over time, and loyalty programs will be a lot more likely to get a little more love. If you spend $5,000,000 to onboard 10,000 new customers per year only to lose 60% of them by the following year, you can see whether or not your marketing plan is in fact a leaky bucket. You can’t know what you don’t know. Calculating LTV gives you parameters with which you can properly analyze your programs’ efficiencies and inefficiencies, including long term ROI.
3. Once you know your customers’ overall average LTV, you can start attacking not only the net new customers piece (acquisition) and the retention piece (loyalty), but the development piece as well. Say your overall customer LTV average works out to be $14,099. Why not try and move that needle up to $15,001, then $15,100, then $15,250? This is the purpose of the customer development side of marketing (or business development, even). Devise ways to grow wallet-share. Increase average spend per transaction (yield) and buy rates (frequency). [Remember FRY? That’s what we’re talking about right now.] Tracking this number not only gives you baselines from which to devise targets and tactics, but it also gives you a dashboard needle with which to gauge your progress AND revise long term sales projections.
Do you know how many product managers and CMOs know how to do this (or bother to do this kind of analysis even if they do)? Not many. If you smell an opportunity to suddenly become a whole lot better at your job and maybe even impress higher paygrades with your business acumen, it means your nose is working.
One quick piece of advice: Don’t just file this away for later. Do something with it. Print the infographic, start playing with the equations, and see what you come up with. Create a baseline. Play with projections. Sift through customer data to see if certain demos might be more receptive to different types of messages and offers. Then use the data; don’t just collect and report it.
Very big hat tip to Business Insider and Liz Scherer for starting the information daisy chain, and of course a big thank you to Kiss Metrics and @avinash for putting together such a clean, clear and concise infographic detailing the LTV calculation process.
PS: If you aren’t familiar with F.R.Y. methodology, it’s all spelled out here:
Score your own copy of Social Media ROI: Managing and Measuring Social Media Efforts in Your Organization (Que) just about anywhere business books are sold, if you haven’t already. The book is actually about a whole lot more than ROI and focuses on a lot of business fundamentals with applications reaching beyond the digital world. (The Chapter on F.R.Y. will be particularly helpful given today’s blog topic.)
You can also check out smroi.net to dig deeper into the book and even sample a free chapter, or let the reviews on Amazon.com help you decide whether or not it is worth the price of a turkey sandwich.
Cheers,
Olivier
Brand Building and Online Marketing Blog 
In terms of comparative ROI for customer acquisition and retention, my clients enjoy thinking about how much less it costs when social CRM becomes united with the traditional practices. Thank you, Mr. Blanchard, for helping with the logic and presentation.
Oooh. This is really interesting. I’m going to have to study this for awhile – one of the things I run into a lot is companies who sell capital equipment – the lifetime of a customer might be one and done if the machine does its job, or at best it might be a sale and then refurbishing. Especially with the down economy, retaining customers by rebuilding/refurbishing has been something we’ve seen more of in our little corner of the business world. Makes it a bit harder to calculate on the kind of every day level that is shown here, but my brain is jogging.
Thanks!
Excellent demonstration of a fact there. Many marketers think attracting new customers is their only job. But this shows retaining your customer is equally (at times more) important.
It is amazing how many people do not pay attention to CLV. CLV is king. If you want to move your business forward you have to focus on increasing CLV. that´s it. Thanks for the info.
These are all excellent tips for promoting customer loyalty online…but what about your offline customers? The business age we live in now allows us many new opportunities with technology advancement to communicate with our customers on a social-media level, but it is important to remember not all your customers will be interacting via the internet. You have to calculate offline interactions into your customer lifetime value. It’s important to make sure the staff you have in place to answer incoming customer calls is a well oiled machine, as well. Using services that provide call tracking and evaluation help you to keep an eye on these staff members…and provide you real-time reports via the cloud that you can access. Some providers like http://www.callcap.com will even listen to your call recordings and grade your staff based on a combination of criteria you provide and their own customer service expertise.
Sure. Offline is at least as important. The overall customer experience is what we’re ultimately talking about here. Product design, shopping experience, after-market service, etc. All of it.