A CLV restart : Eventually you’ll get stuck. It may as well be on a road to customers you want.
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I like KPIs that don’t require an advanced degree to ‘get it.’ At its heart CLV says build stuff people want and don’t waste your time selling to people who aren’t going to buy as much of your stuff as other people who will. The rest is details; some dryasdust but worth sharing because the payoff is as important today as ever before.
Heads-up: This is a tactical post and there’s a Greek symbol just around the corner. If you’d like to bail now I understand.
What we’re dealing with
Customer. In this case your customers (plural). Hopefully you know them and how to find them and connect with them.
Lifetime: That’s how long you want them. More realistically it’s how long, on average, you anticipate a customer will remain a customer.
Value: The margin you’ll earn in exchange for the value you’re delivering.
Here’s an example of a CLV formula. As any quick internet search will reveal, it’s one of many and leans technical.
Plain English interpretation: CLV is the difference between annual customer revenue and costs (e.g. margin, the CRn - Cn) multiplied by the customer retention rate (e.g. the percentage of customers you expect will stick around, the R) compounded over time (the n) and divided by the sum of 1 (one) plus a discount rate (e.g. your expected return on investment in the business being evaluated; the riskier the business, the higher the rate), again compounded over time, the result of which is set against customer acquisition costs (CAC). Note for the more scientific: over time, each customer’s retention rate will change, as will the discount rate. Also note: CAC is often viewed as a separate calculation. I prefer including it because it provides a holistic view of customer economics.
I know it can be a lot of math.
Alternatively, if a back-of-the-envelope calculation is preferred, then it’s worth trying this simple(r) version:
Again in Plain English: CLV is the difference between customer revenue and costs (e.g. margin, the CRn - Cn from the previous example) multiplied by the result of the customer retention rate divided by 1 (one) plus the discount rate minus the retention rate and less customer acquisition costs.
All aboard
Treat CLV conversations like a great excuse to get your people together for a short road trip where the whole team joins the fun. Via CLV:
Marketers reveal who they’re targeting, why, and how much they should be willing to spend to win a customer, plus the importance of customer retention (which cannot be overstated).
Finance can describe how the company’s risk level and budget contribute to customer growth.
Sales illustrates the impact of marketing and product/service decisions on revenue opportunities.
Engineering is able to see how their hard work translates into $$.
When you know what your customers are worth and how they value your product or service, you become more aware of how you’re helping them get unstuck, of the problem they’re paying you to solve. And you can make more strategic decisions including: what projects to fund, how to position and message, which audience(s) to prioritize, and how to more profitably build what you sell and sell what you build. Insider tip: This knowledge isn’t common.
Use cases
The bulk of my CLV-related experience has been in SAAS businesses where ACV (Annual Contract Value) and ARR (Annual Recurring Revenue) play a large role in decision-making and quarterly KPIs. That said, CLV also applies in a wide array of industries and at revenue levels of all sizes. Over the years I’ve used it in consumer tech, mobile telecoms, and elsewhere. Still I haven’t started a fan club…yet.
Closer to the palm of your hand: Ever wonder why you see the ads you see when you’re scrolling through your social feeds? They don’t appear for artistic merit. They show up based upon who available data perceive you to be and who you might become as a margin-generating customer. The more ads you see from one brand, the more that brand is willing to spend to bring you aboard; e.g. the greater they anticipate your lifetime value will be relative to the $$ they’re spending on targeted marketing and sales. It’s an example of CLV at work.
Here’s another example:
Customer X: Annual revenue: $100, Annual costs: $30, Retention rate: 80%, Average years: 5, Discount rate: 17%, Acquisition cost: $80
Customer Y: Annual revenue: $75, Annual costs: $25, Retention rate: 85%, Average years: 5, Discount rate: 15%, Acquisition cost: $80
Pop quiz: Which customer is more valuable?
Ceteris paribus (e.g. all else being equal) and using the simple(r) formula illustrated above, Customer X is more valuable by ~$10. Pat yourself on the back if you guessed calculated correctly.
Practical summary and inspiration for further research
Returning to our driving analogy, knowing how metrics work is like knowing what’s happening under the hood of your car. You can pinpoint what’s going well, what’s on the verge of breaking down, and when to pause and reassess. You can also better describe what’s happening for those who might be in position to help. It’s a simile that doesn’t rust out. (The pun police have been notified.)
All for today
I’ll return to quant topics soon enough. Because knowledge is power and math is good to know.
In the meantime, many happy returns.
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Other recent posts: Sand Mode, Workshop This Way ->, A Brand Statement