Customer lifetime value. The trump card for subscription based businesses.
It’s a valuable metric for businesses where you want to be aiming for light buyers, to inform your customer acquisition cost. Above all - profitable acquisition MUST be your north star metric.
Beating much lauded ROAS… which can mislead decisions as what all looks good on the platform can come undone when you interrogate the individuals and how much it cost to win…and retain their business.
So…
What is it?
Customer Lifetime Value (CLV) the measure of just how much a customer is worth for you.
You might adjust how you calculate this depending on your business type… so here we try to cover off some of them, so you can see how it might differ, and also to help avoid any feelings of ‘whataboutmeeee’ - because, let’s face it, DTC ecom businesses have a LOT of content on this, but others, maybe not so much.
We’ve had a look at CLV across FMCG, Fashion, Homeware, Media, Marketplaces, and B2B SaaS (Software as a Service) businesses:
FMCG (Fast-Moving Consumer Goods):
If you’re FMCG and retail is your main distributor, bolstering distribution with an ecom model, can help you understand how much your customers might be worth in store… and some of the information not passed back by retailers.
Subscription based CLV: if you have a highly consumable, repeat purchase business - like a supplement, or functional drink, it might make sense for you to look over the total period of time a customers’ been with you. Have a look at what is the average tenure - it might be months… or years.
Cohort Analysis: Segment customers into groups with behaviours and calculate CLV for each cohort. This helps identify variations in customer value between groups. This is particularly useful for highly seasonal periods, or where you might deep discount.
Churn Rate and Retention Rate: Determine your churn rates (percentage of customers lost) and retention rates (percentage of customers retained) over time.
Fashion:
Measure from their first purchase with you through to their most recent - consider what promotions might do to shape this for you.
Customer Segmentation: Segment customers based on when they joined you, what they’ve bought (categories, lines, collections), and where they came from. You might notice that customers acquired from an influencer partnership, for example, are more likely to shop when a promotion is on.
A classic for Ecommerce - RFM Analysis: Use Recency, Frequency, and Monetary (RFM) analysis to calculate CLV. The more recent, frequent, and higher the monetary value of a customer's purchases, the higher their CLV.
Homeware:
Product Longevity: Consider the average lifespan of homeware products. Calculate CLV by estimating the customer's total spend on these products over time, and if they’re likely to come back to you.
Customer Engagement: Assess customer interactions and engagement with the brand. More engaged customers who provide referrals or write reviews may have higher CLV due to their positive impact on others.
Media:
Subscription Models: In media businesses, CLV can be based on subscription models. Calculate your CLV by considering the expected duration of a subscriber's engagement and their subscription fees - the paywall is a classic.
Also consider what you know about them - what content they consume, if you also have a store, or events, are they more likely to pay extra for more content from you?
Marketplaces:
Seller/Buyer Behavior: Segment customers based on whether they are sellers or buyers. Calculate CLV separately for each segment, as their value contributions may differ.
Transaction History: Calculate CLV by analyzing a customer's transaction history on the marketplace - how long they’ve been active, if they have ‘tells’ that they might become active again, considering the total revenue generated from their purchases and fees.
B2B SaaS (Software as a Service):
Subscription Contracts: Calculate CLV based on subscription contracts. Consider the contract duration, monthly fees, and potential upsells or cross-sells.
Customer Expansion & ABM: Assess potential expansion revenue from the customer, including additional seats or services, to calculate CLV more accurately.
Make sure you carry this out fairly regularly so you are up to date, and also flag any shifts in cohorts of behaviour.
This should also always be run in conjunction with insight gathering from your audiences - making sure you can capture halo affects on things like uplift in online sales within proximity to stores, etc.
Want more? Come and tell us!
