In the digital age, there are metrics and Key Performance Indicators (KPIs) that are tremendously important to any business. I could provide a list of them, but they are readily available on the internet. In the software-as-a-service (SaaS) business in particular, customer lifetime value is by far the most critical one. But let us be real. For any business which strives to acquire, maintain, nurture, and grow customers over time, customer lifetime is a metric that should be front and center for sales and marketing teams. The term itself contains the words that are essential in making sure a business is profitable and sustainable over the long run.
For those who are not clear on what customer lifetime value is, here is a quick refresher: “Customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or lifetime value (LTV) is a prognostication of the net profit contributed to the whole future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques.”
5 Reasons Why CLTV is Key
Let me explain why this one metric should be the north star for any company.
- Customer centric: CLTV truly focuses on customer behaviors, customer journey, purchasing patterns, quality of relationship, and true profitability over time. It is a representation of what the customer represents for your organization, how loyal they are, and how much more you can exchange with them. It also focuses on the evolution of the customer business and needs over time.
- Value centric: CLTV also connects the value you create and share with your customers to the value your organization gets from them. Your entire customer value proposition delivers value to your customers and your goal is to capture your fair share of it. As you know, value comes from diverse sources: products, services, software, data, etc. CLTV forces sellers, marketers, and pricers to review all these sources and to map the monetization areas: upfront purchases, recurring sales, renewal sales, and upselling and cross-selling areas.
- Future-centric: CLTV provides the right balance between the past and the future. Your organization aims are increasing CLTV by delivering superior value propositions and greater outcomes. Focusing on CLTV also encourages team to project income and profit streams over time and beyond the initial acquisition period. For that, the role of customer success teams is essential in assisting sales and marketing at capturing future value. In SaaS, customer success teams are already in place. It is a fast-growing profession. Outside of SaaS, it is becoming increasingly popular. We start seeing traditional industrial companies forming customer success teams to reap the benefits of recurring and aftersales business models and to deliver value realization reports.
- Outcome-focused: the more outcome you deliver to your customers, the more likely they are to stay with you for the long term, to renew contracts, and to increase their transactions with you. True alignment between your price metrics and the customer’s value metric is a must-have. Therefore, we see new pricing and revenue models focusing on customer usage metrics or outcomes.
- Data centric: Lots of data are needed to conduct a deep analysis of CLTV and to develop a robust predictive model. It does require great systems and the ability to extract customer data from all sources: ERP, CRM, digital marketing, etc.
5 Customer Lifetime Value Statistics
- Just a 5% increase in retention rates yields at least a 25% profit increase.
- New customers cost between 5 and 25 times more than existing customers.
- You have a 60%-70% chance of converting an existing customer.
- Current customers spend on average about two-thirds more than new customers.
- Customer Lifetime Value is an important financial concept for 76% of companies.
How to Calculate and Optimize Customer Lifetime Value [Infographic] – Business 2 Community
Ten Ways to Use CLTV
Focusing on CLTV can change the way your business operated and provide a tremendous boost in your go-to-market approach.
- Develop customer segmentation based on CLTV: It is essential to know what customers are very profitable and provide long-term economic value. You can use CLTV and other metrics to plot your customers and find the core profitable group. Other metrics can include quality and duration of the customer relationship (High/Low) or past LTV versus Future.
- Track your CLTV to Customer Acquisition Cost (CAC) ratio: Once you have performed a CLTV analysis on all your current customers, you will know how much it makes sense to invest on acquisition. You will also know which acquisition channels produce the highest value customers and can repeat the strategies you used to find them. You can set targets of CLTV vs CAC at various times of your organization’s journey.
Quote: “As a rule of thumb, expansion is advisable as soon as the estimated CLV exceeds the CAC by a multiple—even if profitability has not yet been reached. In practice, mature digital business models should display CLV-to-CAC ratios ranging between at least 2:1 and up to 8:1 or more. At this level, CLV can also be used as a metric to measure and improve the performance of organizational units.” 2021 McKinsey: customer-lifetime-value-the-customer-compass.pdf (mckinsey.com)
- Secure future customer VIPs: Once you have a solid data profile of what characteristics your VIPs have, you can use predictive analytics to get a strong idea of which new customers will be future VIPs and focus on these customers with personalized campaigns and offers.
- Use CLTV as a predictor of value prop resilience: CLTV is a future projection of your customer profitability and your ability to extract pricing and value from them. Therefore, your value proposition and your offers must resist the test of time and reflect external dynamics. Is your product roadmap rich in possibility to upsell and extend customer relationships? Is your roadmap innovative enough over time? Do you provide enough performance gaps over time for the customers to remain interested versus competition?
- Evaluate your most effective and valuable marketing channels: CLTV can also change the way Chief Marketing Officers (CMOs) and Chief Revenue Officers (CROs) think about sales enablement and marketing in terms of creating loyalty objectives or focusing spend on underutilized areas. Prioritize marketing channels to acquire the most valuable prospects. This is particularly true if you have a large total addressable market and/or have tons of potential prospects.
- Think short-term and long-term strategies and tactics: CLTV analysis helps CMOs and CROs find balance in terms of short-term and long-term sales goals and demonstrate a better understanding of financial ROI. That includes the right balance of investments, the right pricing strategy, and a relentless focus on customer value management.
- Design future-forward customer growth: the process of designing a partner matrix in the digital age is an essential component of a sound strategy. Growth comes from technology and a product roadmap coupled with an aggressive customer success strategy. Growth also comes from expanding share of wallet, focusing on renewal, and contract expansion over time. If you have sold equipment to a company, you can expect that aftermarket revenues are next in line. Then you can propose digital services and other services around the core equipment functionalities. Growth comes from various sources as well.
- Embrace the right CLTV-related metrics: the most profitable customers can be selected for special retention efforts (duration of relationship, loyalty levels, quality of relationship, for example). They can be grouped into segments based on their CLTV and the segments can then be profiled using various drivers of CLTV: relationship duration, future profitability, historical profits, cost to serve, and share of wallet.
- Embrace an ROI mindset: CLTV allows CROs and CMOs to measure the monetary impact of sales and marketing campaigns, initiatives, and other activities. When you know what drives CLTV and reduces churn, you can be laser focused on your marketing and sales acceleration campaigns.
- Balance your pricing strategy on CLTV: from trials to renewal, pricing strategies and tactics must reflect CLTV-based strategies. Pricing professionals need to price for long-term retention, contract renewal, upselling and cross-selling, and not just for short-term acquisition. They also need to develop pricing models that match customer outcomes and generate important levels of pricing satisfaction.
How Technology Can Help
You cannot rely on simple software and manual processes to adopt a robust CLTV-based approach. Today’s marketers, data scientists, leaders, and other business professionals now have a powerful tool to help them calculate and utilize customer lifetime value: a customer data platform (CDP). A CDP, which is considered the future of CRMs, serves as a central hub for all your critical and relevant customer data, collecting it into individual profiles for each customer. A CDP is an excellent tool for calculating CLTV, since it has all the key ingredients of the formula in one place. Some CDPs even offer CLTV as an out-of-the-box metric at a click of a button.
If you are already focused on value-based strategies, I recommend embracing a Customer Value Data Platform (CVDP) to connect all the relevant customer data to all the customer value management data as well as to other platforms such as ERP, CRM, and sales enablement. Another term for CVDP is Customer Value Management (CVM) software. There are a few solutions commercially available, and they can truly help managing value holistically.
The heart of CLTV is customer value for the customer and for the enterprise. What could be a better place to focus on? Powerful customer value analytics can be connected and integrated with your CLTV analysis. This is standard practice in SaaS organizations that have scaled well. For other organizations, it needs to become a priority as part of the strategic, marketing, and commercial processes. Customers must be managed, nurtured, and served over time. Similarly, customer value must be extracted over time considering the multiple monetization sources.