The strategic value of the Customer Lifetime Value: a world of opportunities

The Customer Lifetime Value has an enormous importance in itself as it allows to quantify and monitor the value over time of the customer. Here's how to measure and monitor CLV

By now considered one of the decisive factors in determining the success of a company and its strategies, the Customer Lifetime Value is increasingly discussed in the business environment among those involved in marketing and customer interaction.

Learning what the Customer Lifetime Value is, what opportunities it offers and how to calculate it is therefore fundamental today: in this article we will find out in detail what it is and why it is good to take it into consideration when you want to optimize the operation of your business .

· Customer Lifetime Value: definition

· Why Customer Lifetime Value is important

· How the LTV is calculated

· The value of the CLV: loyalty and optimization

· Constantly monitor the Customer Lifetime Value

Customer Lifetime Value: definition

If we wanted to analyze the literal translation of the term Customer Lifetime Value, it would return the concept of value over time of the customer. The most accurate definition says that the CLV, this abbreviation often used for this indicator, is basically the total value that a given customer has for the company for the overall duration of its relationship with the organization: it is a parameter that indicates in essence, the expected profits that can be expected to be obtained from an acquired customer, during all the time that he will keep in touch with the business.

In short, a long-term profitability , which considers the purchasing behavior and the related revenues that will be derived from it.

The conclusion of a purchase process by a customer is not to be considered as the end of his customer journey, but the beginning of a moment in which the company's efforts must not slow down but remain constant and well focused. In the period considered as its "lifetime", the customer could in fact purchase the products offered by the company again, buy different ones or decide to become unbalanced and buy more valuable offers, after having tested the company's reliability.

The constant monitoring of the customer's journey and his post purchase behavior is nothing short of deciding to have a complete overview of its activities and its degree of brand loyalty.

The Customer Lifetime Value is therefore configured as an extremely powerful and highly strategic analysis tool capable of simultaneously analyzing different elements and providing each company with excellent information to structure marketing campaigns on various channels with concrete and well-planned objectives, as well as to set correctly the budget to invest . Interaction with customers is one of the crucial aspects of business operations and is the basis of any successful strategy.

Why Customer Lifetime Value is important

There are many companies and marketing professionals who dedicate most of the resources available to them in the acquisition of new customers , rather than preparing them to take care of target users who have already entered the customer journey or who are part of that slice of customers already considered as acquired. Particular attention for the user experience and an eye for those customers already conquered can instead make all the difference in achieving the business objectives.

Although building up a large customer base is undoubtedly important, the process of acquiring a new potential customer is much more expensive, in terms of energy and budget to be entered into the process, than maintaining an already acquired one. Pareto's law also applies in this area and lets us know that 80% of a company's future profits derive only from 20% of its customers : therefore there are user segments that are more profitable, and that can be identified promptly it can basically decide the fate of a company's results.

It is clear at this point why focusing on retention and obsessive care for one 's market niche is indispensable: it is necessary to study in detail your customer target, try to calculate their Customer Lifetime Value as accurately as possible, and invest a lot on the most profitable target group , keeping it faithful over time and increasing its value with targeted marketing efforts.

How the LTV is calculated

Learning to estimate the Customer Lifetime Value is a fundamental objective for those who find themselves planning the strategic steps that the company will have to take. However, a unique formula for calculating the Customer Lifetime Value does not actually exist, since this parameter varies significantly according to the market in which it operates and the type of product offered, and is also linked to all the factors of the marketing mix and the dynamics of sector that may be involved in the analysis.

The elements involved in the CVL estimate are really many and particularly complex, but wanting to simplify its calculation as much as possible, we can say that the variables to be considered without a doubt are the following:

· The average duration of the relationship between the customer and the company

· The average cost per year of the customer

· The percentage profit margin on the customer's expense

The most commonly used formula relates them in this way: multiplying the duration of the relationship over time * the average annual expenditure * the percentage gain.

Obviously this simplistic formula does not claim to be exhaustive and does not take into account factors such as the customer's acquisition cost, its abandonment rate or recurring purchases, as well as many other essential parameters to be integrated in subsequent marketing campaigns given driven.

Technology helps in this regard, since often we will not have to manually calculate the Customer Lifetime Value, but it will be the result of the interpolation of the analytical data collected by the company software used internally by the organization. A sophisticated CRM will be particularly useful, as well as other monitoring tools and the help of artificial intelligence: extremely valuable supports for obtaining an estimate of how much profit each customer actually generates and consequently being able to plan the most correct strategic decisions, both in the field marketing that financial, and general planning.

The value of the CLV: loyalty and optimization

There are many concrete advantages offered by a sophisticated evaluation of the Customer Lifetime Value. The information provided by these calculations helps to understand where to allocate company resources and what are the areas on which it is necessary to think about making improvements.

Once you have studied the Customer Lifetime Value of your customer base in depth, it is possible and indispensable to optimize it and make it more efficient. After obtaining an overview of the purchasing behavior of individual customers, it is essential to try to increase the value generated over time through well-studied after-sales phases and a user experience that invites you to buy back .

Loyalty campaigns must be structured ad hoc and developed in every detail, and it is good to remember that successful marketing is also based and sometimes above all on the retention rate of its customers, i.e. the percentage of customers who continues to make purchases in a selected time lapse.

It should be noted that a newly acquired customer does not have the same value as a loyal customer , who has already had the opportunity to test the product or service, who has drawn positive experiences from it and who has developed an articulated judgment. Giving due importance to this part of the public is an intelligent move, not taken for granted and never useless.

Knowing who the target customers who can generate the highest Customer Lifetime Value are for their business, allows you to concentrate on interception and maintenance over time of those users who are able to bring the greatest long-term value .

Knowing the audience in depth makes it possible to segment it with more precision by directing investments in favor of the most performing customer segments, building targeted and valuable advertising campaigns , and reaching more interesting and profitable public precision. A better command of the phases of the customer journey also leads to better control of the budget invested in each of them, ensuring that the right balance is achieved between the efforts to acquire new leads and customers and those aimed at maintaining and retaining customers.

Furthermore, minimizing the acquisition costs of new potential customers favors the containment of investments and contributes to the further optimization of the budget: CAC (acquisition cost) and LTV (lifetime value) are two important metrics for each type of business and having the full control over these two variables, it is possible to predict the trend of the business over time, with a focus on the medium and long term.

Constantly monitor the Customer Lifetime Value

A last important aspect of a correct management of the Customer Lifetime Value is the ability to constantly monitor it, never losing sight of the analytical data and the general value with respect to the achievement of the company objectives that we have set ourselves. It is not enough to have calculated it once, or to have a partial and generic idea of ​​it, but it needs continuous monitoring over time , since it is a changeable variable that could vary as seen influenced by multiple factors.

Developing better relationships with customers, keeping their involvement rate under control and intervening promptly if it is necessary to re-attach them to the brand, is a job to be carried out constantly, to be able to lower abandonment rates and improve incisively the interactions between the company and its audience .