There are dozens of important metrics a company needs to track and understand to build a successful business. From acquisition cost, sales revenue to the churn rate and many more, these metrics help companies stay on track as the business grows. If you are not tracking your metrics, surprises can happen that will harm your business.
In marketing, multiple important metrics need to be tracked to make sure that customers are acquired at a cost that makes the business sustainable. Most marketing departments keep track of the performance of their campaigns and the churn rate, the latter meaning the number of customers that stop shopping in your store or end their subscription depending on your business model. But there are still companies that do not track their churn rate which is one of the key metrics depending on your business model. Other metrics, such as customer lifetime value (CLV) are not commonly tracked by all companies. If you are not measuring your CLV, surprises can arise without warning and it can mislead your decision-making and prevent your company from growing and scaling at the pace you are expecting.
Why is CLV important
CLV is the total amount of money a customer is expected to spend with your business during the lifetime of the relationship. This metric is important to know because it helps your marketing department with insights on how they should distribute the money between acquiring new customers and retaining existing customers, how the investment in the customer stock should be viewed. Knowing CLV helps you determine how much money you can spend on each customer, in the different life-time phases. Let’s look at a short example
You estimate that a customer X acquired through a marketing campaign has a CLV of $100. The cost to acquire this customer through the campaign was $60; you are now planning on doing a retention campaign for existing customers costing $50/customer. Since the CLV of X is $100 and the sum of the campaigns will be $110, we shouldn’t include customer X in the retention campaign since this would result in an expected loss for the company, $100 – ($60 + $50) = -$10.
Understanding and approximating your CLV well can help your business shape its strategy to keep loyal customers instead of acquiring new customers through expensive campaigns, or acquire new customers and not spend more on retaining old customers, and understand how this affects the CLV. At Decision Labs, we work with advanced CLV models to help your business grow.
