Why is Customer Lifetime Value so Important?
Well, we calculated CLV, drowned in formulas or saw the result! So what’s going on now?
In this article, I have tried to address CLV as a continuation of the previous one.
Note: I usually will use some abbreviated words below:
- Customer Lifetime Value — CLTV or CLV
- Lifetime Customer Value — LCV
- Life Time Value — LTV
- Customer Acquisition Costs — CAC
- Key Performance Indicator — KPI
Let’s start…
When coupled with another metric, CAC, CLV becomes particularly valuable by measuring the efficiency of a critical part of your business: the sales and marketing funnel.
CAC is the cost to acquire a new customer. You can break this down into two costs: sales and marketing costs.
CAC is simply your total sales cost + total marketing cost, divided by your total new customers over a given period of time.
So the CLV: CAC ratio measures the relationship between the LTV of a customer and the cost of acquiring that customer. It is a KPI traditionally used by investors and venture capitalists as an evaluation of business growth and viability.
To break it down, you can have three different situations:
1. Business failure where CAC > CLV
In this situation, you are paying more money to acquire consumers than they are providing you with over their lifetime relationship with your company. So, the more consumers you gain, the more the money depletes. The quicker you acquire customers, the quicker you run out of cash.
2. Business stagnation where CAC = CLV
Here, you are paying the same amount of money to attain a customer as they are paying you back over their lifetime with your company. At this point, you are essentially flatlining; from a cashflow point of view, you’ll be negative for the entirety of the consumer’s lifetime with you as it will take them their entire lifetime to repay the initial spend.
3. Business success where CAC < CLV
This situation is ideal — you payback your CAC over the course of your consumer’s lifetime with your company, and you’re also producing further revenue. Your company will grow, and you should strive for further customer acquisition to grow your business faster. However, to ensure the cost of acquiring customers isn’t higher than anticipated, you need to model CLV.
In the end of day, CLV and CAC metrics are rarely static, and they are very sensitive to assumptions. Consequently, early-stage investors can be sceptical of these ratios. To combat this, research the CAC, churn and CLV of similar companies to yours at scale, and work to those benchmarks. If not, you need a convincing response to why you’re more efficient or have a stickier product. Secondly, prepare a detailed plan for increasing and evolving your LTV over time.
And also i recommend to you very nice and clear article from Harward Business Review about CLTV.
That’s all I have to say about CLTV.
This is all I have written about the “Data Science Project Cycle”. If you want to know more about DS and related others, you can check out my other serial articles. Sample:
What is Data Science(DS) and How can it be learned?
You can reach me from my Linkedin account for all your questions and requests.
Hope to meet you in other series articles and articles…🖖🏼
References
1. https://www.business2community.com/consumer-marketing/how-customer-value-affects-your-business-02095088
2. https://en.wikipedia.org/wiki/Customer_lifetime_value#cite_note-Marketing_Metrics-1
3. https://www.seedrs.com/academy/how-to-calculate-customer-lifetime-value/
4. https://www.conductor.com/blog/2018/10/delivering-customer-value/
5. https://www.propellercrm.com/blog/customer-lifetime-value-clv
6. https://contentmaximiser.com/5-simple-ways-to-calculate-customer-lifetime-value/
7. https://sublytics.com/blog/how-to-justify-your-customer-acquisition-cost/
8. https://mathchi.medium.com/what-is-data-science-ds-and-how-can-it-be-learned-948eb23937b2
9. https://hbr.org/2014/07/how-valuable-are-your-customers
