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.

Growth Goals

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)

This 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

An important 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 period.
  • 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:

Multiply customer value by the average customer lifespan.

Improving LTV

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.

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Stephanie Ostermann

Stephanie has eight years of experience in content strategy across all channels; specializing in content creation, execution and deployment, social media scheduling and community management. She holds her Bachelor of Arts in Professional Communication from Royal Roads University. Stephanie wonders how communities define and redefine themselves both on and offline. You can connect with her on LinkedIn.