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How to calculate customer lifetime value and maximize it for your business

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How to calculate customer lifetime value and maximize it for your business



How valuable are your existing customers? It costs less to retain an existing customer than it does to find and attract a new one. Existing customers build value over time, and you can measure that value by tracking a metric called customer lifetime value, or CLV. It’s not just about the purchases your customers make, but about the relationships they build and bring to your business.

Key takeaways

  • Customer lifetime value (CLV) measures the value a customer provides over the length of their relationship
  • To calculate CLV, multiply the average order value by the average number of transactions per period by the expected lifetime of that customer
  • Tracking CLV helps you identify your best customers, improve retention rates, reduce customer acquisition costs, develop more effective sales and marketing strategies, and improve your forecasting

What is customer lifetime value?

Customer lifetime value (often referred to as just lifetime value, or LTV) is a way to measure the value a customer brings to your business over the entire length of your relationship. At its most basic, CLV estimates the total income a customer can expect to generate for as long as that individual remains a customer. It’s a measurement and it’s a projection that attempts to quantify how much retaining a customer is worth to your business.

Know that while you may end up with a similar CLV number for a given customer, how that number is arrived at can differ significantly from customer to customer. Does a given customer generate value based on multiple low-dollar purchases or fewer higher-dollar sales? It’s possible for a customer you see only once a year to have a higher CLV than one you see every week—or vice versa.

How do you calculate customer lifetime value?

To calculate CLV, you need three separate inputs: 

  • Average number of transactions per period
  • Expected length of engagement

This data is easily gathered via Salesforce or other CRM solutions—which can also help you analyze the data and provide further insights. Let’s look at each of these inputs separately. 

Average order value

The first step in calculating CLV is to determine your average order value for a specific customer or customer type—that is, the dollar value of that customer’s average sale. It’s best to look at this value for a 12-month period to even out seasonal fluctuations. Go back too far, however, and inflation effects will tend to underestimate the average value. 

Average number of transactions per period

Next, determine the average number of transactions made by that customer or customer type over an extended period of time. Going back just a year might not be enough. It’s better to gauge customer transactions over a three- to five-year period. 

Expected length of engagement

Finally, you need to determine how long the average customer—not a specific customer—remains a customer. Some products and brands inspire lifelong loyalty, others have more transient customer bases. The expected length of customer engagement is a more objective measurement than the first two and requires you to make some hard choices.

Calculate CLV

With these three metrics in hand, you can now calculate CLV by multiplying the three of them together, like this:

Average transaction size x number of transactions x expected length of engagement = CLV

As an example, take the following numbers:

  • Average transaction size of $100
  • Average number of transactions per year of 4
  • Expected length of engagement of 10 years (customers stay customers for 10 years, on average)

Multiply these three factors together and you get:

$100 x 4 x 10 = $40,000

That is, the lifetime value of this particular customer is $40,000. Put another way, losing this customer could cost you $40,000 in lifetime revenue. 

How can you maximize customer lifetime value in your business?

Focusing on CLV has benefits to any business. In a recent survey, 81% of companies say increasing CLV results in more sales, 68% say it increases customer retention, 56% say it encourages brand loyalty, and 52% say it results in more timely marketing. 

There are several approaches you can take to increase your company’s CLV, including better using your available data, extracting better insights in your customers, and improving your grand reputation. Here are a few more of the most significant ways your business can maximize customer lifetime value.

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Identify and better serve your best customers

Calculating CLV for individual customers or customer segments helps you identify your best customers—those with the highest lifetime value. By segmenting customers in terms of CLV, you can better target customer products and offers to different groups of customers. 

For example, you can send more offers to your best customers because you know they’re more inclined to buy from you. This could mean sending them more frequent email offers, inviting them to special “favorite customer” events, and promoting add-on sales that generate higher profit margins. 

Improve retention rates

Studies have shown that it costs five times more to attract new customers than it does to retain existing ones. This is easily demonstrated by comparing your CLV with the cost of acquiring a new customer. If you have a low CLV and a high customer acquisition cost, you can’t afford to lose old customers. Tracking CLV forces you to pay attention to retaining your existing customers to maximize their lifetime value. 

Optimize customer acquisition and reduce acquisition costs

While we’re on the topic of customer acquisition, analyzing existing high-CLV customers can help you identify potential customers with similar characteristics. If your high-CLV customers tend to live in a particular ZIP code, have a certain level of education, or share certain hobbies, you can target new customers in the same ZIP code, with the same education level, or who also participate in those hobbies. 

By better targeting potential customers, you don’t waste your acquisition spend and end up not only attracting more customers but reducing your customer acquisition costs. You also attract more potential high-CLV customers.

Develop more effective sales and marketing efforts

When you dig deeper into the individual components of CLV, you can start making developing more effective sales and marketing strategies. Personalizing your efforts towards specific customer segments almost always produces better results. 

In a real-world example of this, Tea Forte, a global luxury tea brand, improved CLV by 25% by using Optimizely to introduce personalized campaigns tailored to specific customer types. The better you understand what drives your customers, the more effectively you can market to them.

More accurate forecasting

Tracking CLV helps you make more accurate sales forecasts because you have a better handle on future revenue streams from your customer base. This in turn helps you make better-informed decisions about staffing, inventory and other costs. More detailed forecasting also leads to increased productivity and reduced costs, both of which positively impact your bottom line. 

Let Optimizely help you utilize CLV in your business

When you want to better utilize CLV in your business, turn to the experts at Optimizely. Our Digital Experience Platform not only tracks the data you need to measure CLV, it also helps you provide a more personalized experience for your customers, which increases customer retention and increases CLV. We’ll work with you to turn your customer data into a compelling digital experience across all possible touchpoints. 

Contact Optimizely today to learn how personalizing the customer experience increases CLV.


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Marketing Team Reorgs: Why So Many and How To Survive

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Marketing Team Reorgs: Why So Many and How To Survive

How long has it been since your marketing team got restructured? 

Wearing our magic mind-reading hat, we’d guess it was within the last two years. 

Impressed by the guess? Don’t be.  

Research from Marketing Week’s 2024 Career and Salary Survey finds that almost half of marketing teams restructured in the last 12 months. (And the other half probably did it the previous year.) 

Why do marketing teams restructure so often? Is this a new thing? Is it just something that comes with marketing? What does it all mean for now and the future? 

CMI chief strategy advisor Robert Rose offers his take in this video and the summary below. 

Marketing means frequent change 

Marketing Week’s 2024 Career and Salary Survey finds 46.5% of marketing teams restructured in the last year — a 5-percentage point increase over 2023 when 41.4% of teams changed their structure. 

But that’s markedly less than the 56.5% of marketing teams that restructured in 2022, which most likely reflected the impact of remote work, the fallout of the pandemic, and other digital marketing trends. 

Maybe the real story isn’t, “Holy smokes, 46% of businesses restructured their marketing last year.” The real story may be, “Holy smokes, only 46% of businesses restructured their marketing.” 

Put simply, marketing teams are now in the business of changing frequently. 

It raises two questions.  

First, why does marketing experience this change? You don’t see this happening in other parts of the business. Accounting teams rarely get restructured (usually only if something dramatic happens in the organization). The same goes for legal or operations. Does marketing change too frequently? Or do other functions in business not change enough? 

Second, you may ask, “Wait a minute, we haven’t reorganized our marketing teams in some time. Are we behind? Are we missing out? What are they organizing into? Or you may fall at the other end of the spectrum and ask, “Are we changing too fast? Do companies that don’t change so often do better? 

OK, that’s more than one question, but the second question boils down to this: Should you restructure your marketing organization? 

Reorganizing marketing 

Centralization emerged as the theme coming out of the pandemic. Gartner reports (registration required) a distinct move to a fully centralized model for marketing over the last few years: “(R)esponsibilities across the marketing organization have shifted. Marketing’s sole responsibilities for marketing operations, marketing strategy, and marketing-led innovation have increased.”  

According to a Gartner study, marketing assuming sole responsibility for marketing operations, marketing innovation, brand management, and digital rose by double-digit percentage points in 2022 compared to the previous year.  

What does all that mean for today in plainer language? 

Because teams are siloed, it’s increasingly tougher to create a collaborative environment. And marketing and content creation processes are complex (there are lots of people doing more small parts to creative, content, channel management, and measurement). So it’s a lot harder these days to get stuff done if you’re not working as one big, joined-up team. 

Honestly, it comes down to this question: How do you better communicate and coordinate your content? That’s innovation in modern marketing — an idea and content factory operating in a coordinated, consistent, and collaborative way. 

Let me give you an example. All 25 companies we worked with last year experienced restructuring fatigue. They were not eager creative, operations, analytics, media, and digital tech teams champing at the bit for more new roles, responsibilities, and operational changes. They were still trying to settle into the last restructuring.  

What worked was fine-tuning a mostly centralized model into a fully centralized operational model. It wasn’t a full restructuring, just a nudge to keep going. 

In most of those situations, the Gartner data rang true. Marketing has shifted to get a tighter and closer set of disparate teams working together to collaborate, produce, and measure more efficiently and effectively.  

As Gartner said in true Gartner-speak fashion: “Marginal losses of sole responsibility (in favor of shared and collaborative) were also reported across capabilities essential for digitally oriented growth, including digital media, digital commerce, and CX.” 

Companies gave up the idea of marketing owning one part of the customer experience, content type, or channel. Instead, they moved into more collaborative sharing of the customer experience, content type, or channel.  

Rethinking the marketing reorg 

This evolution can be productive. 

Almost 10 years ago, Carla Johnson and I wrote about this in our book Experiences: The 7th Era of Marketing. We talked about the idea of building to change: 

“Tomorrow’s marketing and communications teams succeed by learning to adapt — and by deploying systems of engagement that facilitate adaptation. By constantly building to change, the marketing department builds to succeed.” 

We surmised the marketing team of the future wouldn’t be asking what it was changing into but why it was changing. Marketing today is at the tipping point of that. 

The fact that half of all marketing teams restructure and change every two years might not be a reaction to shifting markets. It may just be how you should think of marketingas something fluid that you build and change into whatever it needs to be tomorrow, not something you must tear down and restructure every few years.  

The strength in that view comes not in knowing you need to change or what you will change into. The strength comes from the ability and capacity to do whatever marketing should. 

HANDPICKED RELATED CONTENT:  

Want more content marketing tips, insights, and examples? Subscribe to workday or weekly emails from CMI.

Cover image by Joseph Kalinowski/Content Marketing Institute 

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Boost Your Traffic in Google Discover

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Boost Your Traffic in Google Discover

2. Understand topical authority: Keywords vs. entities

Google has been talking about topical authority for a long time, and in Discover, it is completely relevant. Traditional SEO includes the use of keywords to position your web pages for a specific search, but the content strategy in Discover should be based on entities, i.e., concepts, characters, places, topics… everything that a Knowledge Panel can have. It is necessary to know in which topics Google considers we have more authority and relevance in order to talk about them.

3. Avoid clickbait in titles

“Use page titles that capture the essence of the content, but in a non-clickbait fashion.” This is the opening sentence that describes how headlines should be in Google’s documentation. I always say that it is not about using clickbait but a bit of creativity from the journalist. Generating a good H1 is also part of the job of content creation.

Google also adds:

“Avoid tactics to artificially inflate engagement by using misleading or exaggerated details in preview content (title, snippets, or images) to increase appeal, or by withholding crucial information required to understand what the content is about.”

“Avoid tactics that manipulate appeal by catering to morbid curiosity, titillation, or outrage.

Provide content that’s timely for current interests, tells a story well, or provides unique insights.”

Do you think this information fits with what you see every day on Google Discover? I would reckon there were many sites that did not comply with this and received a lot of traffic from Discover.

With the last core updates in 2023, Google was extremely hard on news sites and some niches with content focused on Discover, directly affecting E-E-A-T. The impact was so severe that many publishers shared drastic drops in Search Console with expert Lily Ray, who wrote an article with data from more than 150 publishers.

4. Images are important

They say that a picture is worth a thousand words. If you look at your Discover feed, you’ll see most of the images catch your attention. They are detailed shots of delicious food, close-ups of a person’s face showing emotions, or even images where the character in question does not appear, such as “the new manicure that will be a trend in 2024,” persuading you to click.

Google’s documentation recommends adding “high-quality images in your content, especially large images that are more likely to generate visits from Discover” and notes important technical requirements such as images needing to be “at least 1200 px wide and enabled by the max-image-preview:large setting.” You may also have found that media outlets create their own collages in order to have images that stand out from competitors.

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Everything You Need to Know About Google Search Essentials (formerly Google Webmaster Guidelines)

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Everything You Need to Know About Google Search Essentials (formerly Google Webmaster Guidelines)

One of the most important parts of having a website is making sure your audience can find your site (and find what they’re looking for).

The good news is that Google Search Essentials, formerly called Google Webmaster Guidelines, simplifies the process of optimizing your site for search performance.

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