Customer lifetime value is an overall important business metric.
But it’s also a strategy, a guiding principle and a filter for running your enterprise.
In this new multi part series, we’re going to show you how to use customer lifetime value to build a smarter, more efficient marketing machine. And we will do so through our expertise around optimized ad spend, better email programs and more sustainable growth.
In this first post, let’s explore its significance of this metric, along with why companies overlook it.
There are some companies that will get a customer to buy something once, and probably never again. Think about a mattress company, which lives on that end of the buying spectrum. Loyal customers might buy a second one for their kids down the road, but generally, that type of business won’t see a ton of repeat purchases. Unless, of course, they also sell pillows, blankets, sheets and other bedroom products.
On the other end of the value spectrum, you have companies for whom a huge part of their overall revenue comes from repeat purchases. RJ Metrics is cited in a super in depth study from 2015 that's awesome. It says that on average, you get 65% of a customer's 365 value on day 1.
Translation, if your company was not focused on customer lifetime value, according to these numbers, you’d be making sixty five dollars on your first day. and ignoring the other thirty five dollars. That's more than a third of the customer's first year revenue.
Ultimately, earning repeat purchases is generally much less expensive than going out and finding a new customer. Because those people already know your brand. They're more likely to convert. You can email them personally instead of just putting ads in front of them and hope they buy.
Firstly, customer lifetime value is not the easiest metric to calculate. And many merchants don’t have the confidence about the right way to do so. Some people either go extremely deep and statistically complicated, or do some simple back of the envelope math.
Another reason merchants miss the mark is their technology. Many of the platforms ecommerce companies use to manage their businesses will have data analysis functionality, whether it's Google Analytics or some other vendor. And those programs will have built in capabilities for customer lifetime value. But the problem is, those features won’t be front and center.
The third reason cltv is overlooked is, ecommerce companies inherently tend to be short term focused in business. Imagine a seller is running paid ads for their apparel line. They’re wondering if they are making money on the first sale, because it’s an easier objective to think about. After all, who knows where their company, products or brand is going to be in six months or twelve months? But that long term thinking is essential.
But despite the complexity of this metric, customer lifetime value is crucial to the growth of your brand. Sure, it may be hard to think about cltv because it doesn’t really make that much of a difference with your revenue this month.
But it has a huge difference over time.