Tactics > lists and data
The lifeblood
of your business
Customer lifetime value
is a critical business
metric. Here’s how to
calculate and use it
he lifetime value (LTV) of your customers
T
is one of the most critical pieces of
information you need to know. I guarantee
you, when you understand this, you will
think differently about your business, your
marketing investment, and your customers.
More important, this knowledge will help you change your
tactics to deliver more profit.
So what is lifetime value?
LTV is the total worth to you in sales and profit over a given
period (say, six months, 12 months, and 24 months) of
every customer you recruit. Understanding this is not just
important; it’s essential. If you don’t know how much your
customers are worth to your business, you could end up
recruiting too few customers, resulting in minimal growth
and profits. Or you could find yourself overrecruiting—that
is, spending far more on recruiting customers than they’ll
ever deliver to you in profit. By fully understanding what
the lifetime value of a customer is—and LTVs do vary within
your house file by customer type and segment—you can
start to understand the universe of your potential customers
and the growth opportunities that exist for your business.
Let’s say you’re currently spending £20 to recruit each
new customer. Then you find out that within three months
each customer is worth £100 in profit. You might then
want to ramp up your recruiting efforts, even if you have to
spend £40 or £50 per customer.
By Kevin McSpadden
In these turbulent times it’s natural that businesses are
cutting their marketing budgets, and in some cases this is
the right thing to do. The easiest place to cut is acquisition.
Why? Well, on pure return-on-investment metrics, in
almost all cases, it’s more profitable to market to existing
customers before trying to get new ones. Marketing as a
percentage of sales for customer acquisition is typically
significantly higher (two to three times higher in some
cases) than marketing to existing customers. So if you have
For more by Kevin McSpadden, see
to cut spend, it’s normally spend on acquisition marketing.
“The benefits of binary file forecasting” Don’t forget, though, that not only do new customers
at www.catalog-biz.com.
make up, in most cases, a significant proportion of
this year’s sales, but they also make up a tremendous
proportion of next year’s sales. Businesses simply can’t
afford not to recruit new customers. Doing so effectively
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