How can you use customer lifetime value to optimize your marketing budget?

Customer lifetime value (CLV) is a metric that measures how much revenue a customer generates for your business over their entire relationship with you. It can help you optimize your marketing budget by identifying your most valuable and loyal customers, and allocating more resources to retain and grow them. In this article, you will learn how to calculate CLV, how to segment your customers based on CLV, and how to use CLV to improve your customer churn prediction and prevention strategies.

1 Calculating CLV

To calculate CLV, you need to estimate three variables: the average revenue per customer, the average retention rate, and the discount rate. The average revenue per customer is the amount of money a customer spends on your products or services in a given period, such as a month or a year. The average retention rate is the percentage of customers who continue to buy from you in the next period. The discount rate is the interest rate that reflects the present value of future cash flows. You can use this formula to calculate CLV:

CLV = (average revenue per customer x average retention rate) / (1 - discount rate - average retention rate)

For example, if your average revenue per customer is $100, your average retention rate is 80%, and your discount rate is 10%, your CLV is:

CLV = ($100 x 0.8) / (1 - 0.1 - 0.8) = $400

This means that each customer is worth $400 to your business over their lifetime.

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Albaraa Al-Thami, MSc

Retail Growth Strategy Visionary💡 | Crafting Customer-Centric Growth | Franchise Expert & Frontline Regional Leader | Marketing Analytics Expert
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CLV is not fixed, it's actually dynamic. These variables are impacted by shifts in the market and in consumer behavior. To ensure accuracy and applicability in your strategic choices, it's critical to update your CLV calculations on a regular basis by incorporating fresh information and emerging trends.

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Dasha Randlett, MBA

Marketing Director | Leveraging AI & Data for Growth in Healthcare & Industrial Sectors
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To calculate Customer Lifetime Value (CLV) effectively: * Update Average Revenue: Regularly, considering customer segments. * Monitor Retention Rate: Implement and track loyalty strategies. * Choose the Right Discount Rate: Reflecting industry risk. * Maintain Formula Consistency: Align time periods in calculations. * Use CLV Strategically: For resource allocation and strategy evaluation. * Watch External Factors: Economic and market changes. Regularly review data to ensure accurate CLV estimates.

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Aparna S.

Global Market Researcher for Agriculture Products, Pharmaceutical, Herbal Extracts, Essential Oils & more || Conducting thorough research on worldwide markets, analyzing trends & communicating impactful insights
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Calculate your CLV for each customer or segment and compare it with your CAC. CLV gives businesses a long-term view of customer relations, which can be useful in predicting future revenue.

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2 Segmenting customers based on CLV

Once you have calculated CLV, you can segment your customers into different groups based on their CLV. This can help you understand their behavior, preferences, and needs, and tailor your marketing campaigns accordingly. For example, you can segment your customers into four groups: high-value, low-value, high-potential, and low-potential. High-value customers are those who have a high CLV and a high retention rate. They are your most loyal and profitable customers, and you should focus on retaining and rewarding them. Low-value customers are those who have a low CLV and a low retention rate. They are your least loyal and profitable customers, and you should either try to increase their value or reduce your acquisition and service costs. High-potential customers are those who have a low CLV but a high retention rate. They are your future stars, and you should focus on increasing their revenue and satisfaction. Low-potential customers are those who have a high CLV but a low retention rate. They are your at-risk customers, and you should focus on preventing their churn and re-engaging them.

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Albaraa Al-Thami, MSc

Retail Growth Strategy Visionary💡 | Crafting Customer-Centric Growth | Franchise Expert & Frontline Regional Leader | Marketing Analytics Expert
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Think about the 'Sleeping Giants,' clients who have inconsistent retention and low CLV. They are frequently disregarded, but with tailored engagement, they can be brought back to life and possibly reveal untapped sources of income. Historical evidence indicates that, given the right care, idle accounts can produce unexpected returns.

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3 Using CLV to improve customer churn prediction and prevention

Customer churn is the loss of customers who stop buying from you or switch to a competitor. It can have a negative impact on your revenue, profitability, and growth. To predict and prevent customer churn, you can use CLV as a key indicator of customer loyalty and satisfaction. By tracking and analyzing the changes in CLV over time, you can identify the factors that influence customer retention and churn, such as product quality, customer service, pricing, promotions, and competition. You can also use CLV to segment your customers into different risk levels, and design targeted interventions to reduce churn and increase retention. For example, you can offer incentives, discounts, loyalty programs, referrals, feedback, or personalized recommendations to your high-value and high-potential customers, and improve your product features, service quality, or communication channels to your low-value and low-potential customers.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you use customer lifetime value to optimize your marketing budget?

1

2

3

4

1 Calculating CLV

2 Segmenting customers based on CLV

3 Using CLV to improve customer churn prediction and prevention

4 Here’s what else to consider

Marketing Analytics

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How can you use customer lifetime value to optimize your marketing budget?

1

2

3

4

1 Calculating CLV

2 Segmenting customers based on CLV

3 Using CLV to improve customer churn prediction and prevention

4 Here’s what else to consider

Marketing Analytics

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