August 29, 2019 | By Stephanie Ostermann
Let’s Stay Together: Calculating Lifetime Customer Value
When it comes to setting budgets for marketing, the general rule
of thumb is to base your marketing budget on your revenue. B2B companies
generally budget 2-5%, while B2C companies allocate 5-10%. But how will you
know if the way you are using those funds is working? And how do you know how best
to bucket that money into various tactics?
In the days of traditional marketing, most, if not all, of a
marketing budget was spent on sales-driven tactics. Commercials, print ads,
radio jingles – all were focused on getting a customer to purchase a product or
service, through increased awareness of that product. Audiences were captive,
and they had few opportunities to actually interact with a brand.
The shift to digital marketing presented a challenge. When a
company allocates budget to a print ad, or a commercial, they receive a
tangible product. Digital tactics were harder to understand, and impossible to
touch. The fast pace and noise of the digital space made them seem fleeting.
But they also presented a unique opportunity that hadn’t been available before
– engagement. Brands could now interact with their customers in real time. They
could hear their needs and shape products built to meet them. And yet, in the
early years, marketing strategies were still built with a traditional mindset –
sell, sell, sell – to as many people as possible.
Many marketing strategies focus on bringing new customers into the sales funnel but fail to continue to nurture them after the sale. Acquiring a new customer is undeniably expensive – up to 5x more expensive, in fact, than selling again to an existing customer. Your existing customers have already shown interest in your brand through their purchase, and if they had a good customer experience, they will remain loyal. They are 50% more likely to buy new products, and spend 31% more. (Source)
is the main goal of growth marketing: to retain existing customers so they
purchase again and again. It turns customers into vocal advocates of your
brand, and nurtures a lifetime of loyalty. Budgets are applied with more
precision, focusing on those who are most profitable, and providing them with
added value to maintain the ongoing relationship between customer and brand.
The Value of Existing Customers
metric that can help you understand the value of investing in growth marketing
is customer lifetime value (LTV). When measured against the cost of customer
acquisition, you can easily see how long any given investment in marketing will
take to see returns.
LTV can also help
you to identify your most valuable customer segments, so you can allocate
marketing dollars accordingly.
To calculate LTV, you’ll
need to crunch a few numbers first:
- Average purchase value: Total revenue in given time period (ie.
a year) divided by the number of purchases during that same period.
- Average purchase frequency rate: The number of purchases made
divided by the number of unique customers who made purchases in that time
- Customer value: The average purchase value multiplied by the
average purchase frequency rate.
- Average customer lifespan: The average number of years a
customer continues purchasing from your company.
Now, you can
determine your LTV:
value by the average customer lifespan.
It’s important to
remember that LTV is not a fixed number. It can be improved. Consider the
importance your company is placing on customer satisfaction. Do you have a
strong customer service program, or warranty structure? What measures are you
taking to increase customer success? Arming your sales and customer service
teams with the tools they need to solve customer problems will improve your LTV
over time – reducing churn and increasing loyalty.
Building Lifetime Loyalty with Content
Want to know more
about growth marketing? Register for our webinar Beyond the Blog: Building
Lifetime Loyalty With Content to discover how your content strategy can help
you build and maintain lasting relationships with your customers.