Customer Lifetime Value (CLV)
Customer Lifetime Value (CLV) measures how much a customer is worth over his or her lifetime (in other words, how much this customer is going to spend in the store throughout his or her relationship with it). It is the single most important metric for any customer-centric organization. For organizations that think of customers as their primary strategic investment, accurately measuring the value of this investment over time is an essential dashboard metric.
You can read more about CLV here, including historical and predictive approaches to measuring CLV.
A company that sees the CLV of its customers increasing would want to understand why. Is it because the company is acquiring more valuable customers, or because its retention strategy is effectively increasing the value of each new customer? Similarly, a company that sees its CLV decreasing might want to explore strategies to acquire customers from a different mix of channels or put a cultivation and retention strategy in place to boost the value of its customers.
But at the highest level, CLV is a “weather vane” that indicates whether all that the marketing team is doing -- investing across different acquisition channels, putting retention strategies in place to keep customers coming back -- is resulting in more meaningful, profitable long-term customer relationships.
Customer Equity is the total value of all of the new customer relationships created in a given period. It’s equal to the number of new customers acquired in a given period, multiplied by the CLV of those customers.
Side-by-side with CLV, customer-centric marketing organizations care deeply about Customer Equity.
Here’s the intuition: Companies often face a tradeoff between the number of customers acquired, and the lifetime value of those customers. A marketing organization could focus on a broad strategy that brings lots of new shoppers through the door -- but many of those customers might have a low level of brand awareness and attachment, and might be less valuable in the long run. Conversely, a company could focus on a narrow or targeted strategy that brings in a smaller number of more valuable customers.
Which strategy is better?
If the goal is to maximize the total amount of customer value, the answer is: it depends. We need to take into account both the number of customers acquired and the CLV of those customers.
While CLV alone offers visibility into the value of new customers acquired, Customer Equity provides a broad view of how much customer value the company is creating -- and whether it is striking the optimal balance between quantity and quality of new customers acquired.
Changes in CLV are easy to measure and track over time, specifically with predictive approaches. And they shed light on how effectively the team’s marketing efforts are acquiring and retaining high-value customers.
But the single CLV metric doesn’t offer a lot of insight into why changes are taking place. Did CLV increase last month because of the team’s acquisition tactics (e.g., investing more in high-value channels) or because it made enhancements to its retention efforts?
In order to understand changes in CLV -- and take action on opportunities from the data -- we need to drill into specific acquisition and retention KPIs, which we present in the next lesson as Managerial Level metrics.