An Brief Intro To CLV (And Why You Should Measure It)

CLV

The following is my latest Analytics column, originally published on ClickZ. You can read my previous postings on ClickZ here.

While there’s no single perfect metric for understanding your users, the one that comes closest is customer lifetime value (CLV). What is CLV if you’re new to the concept? It’s the present value of the future cash flows attributed to the customer during their entire relationship with the company, according to the MASB.

It seems simple enough but is one of the most misunderstood or ignored concepts in marketing because it’s inherently a long view, and our industry has suffered from shorter and shorter term tactical thinking as we rush from campaign to campaign. To adopt CLV is ultimately to take a more strategic method of measurement because it’s considering the future, not simply tracking results of the past. Understanding CLV also will let you debunk the old myth that it’s more expensive to acquire new users than keep old ones. Of course you want to keep (most of) your old customers, no one wants to lose customers, but understanding which are the most valuable is what’s truly important to not just keep those, but find more like them.

Both small businesses and large  benefit from measuring customer lifetime value, and yet in both cases we come across examples where it’s not considered. My friend Peter Shankman illustrates a situation where ignoring CLV can be costly in a post titled “would you lose a customer over seven cents?”

The whole post is worth reading, but the summary is that Peter goes to the same deli for lunch frequently, and was one day short seven cents for his meal. The restaurant was inflexible on an insignificant cost which succeeded in doing nothing but frustrating Peter. They were thinking about how important following a policy is vs. keeping someone valuable to them happy. It’s easy to fall into that line of thinking because it’s typically part of a process, but if the person serving Peter was trained in a way to understand the lifetime value of special customers and sometimes break processes for them where it makes sense, they would have clearly let the 7 cents slide.

That Peter then went and shared his experience on his blog (he was nice and protected the name of the restaurant – most people would not) shows that not only is valuing your customers important to increase long term growth it can also generate PR for you. Whether that’s positive or negative is up to businesses, but I can guarantee the ones that understand and value CLV (Amazon, for example) are going to generate warm feelings and reactions from customers.

CLV also helps solve the question for your organization of what types of users will be the most valuable over a continuum as opposed to ones that purely spend money today. For example, a flash sale might generate value-oriented customers and revenue today, but few may ever make a purchase again. Some research even says this could hurt you. While instead of a flash sale, perhaps the right seasonal offer actually brings in repeat customers that aren’t purely interested in discounts.

In a world with greater and greater choice finding the best customers, keeping them happy and understanding their value is vital for you to succeed long term. For a guide on getting started with measuring CLV this post from Avinash is a great place to get started.  

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