We live in a world of vanity metrics. I have x thousand followers, or y number of pageviews, but this data doesn’t tell us much about how well we are able to convert fans or visitors into customers, nor how many customers we turn into repeat customers. It can be all too easy to become fixated on vanity metrics and celebrate success when you’re really missing your goals.
Which is better, a site that gets 10,000 unique visitors/month that makes $5,000/month or a site that gets 100,000 unique visitors/month that makes $100/month? The answer is obvious but I can tell you the owner of the the site getting 100,000 unique visitors/month is bragging about their traffic, when they should really be terrified that with that much traffic they aren’t making very much money.
Enough about vanity metrics, let’s talk about Customer Lifetime Value (CLV) also often called Lifetime Customer Value (LCV). Let’s start with the basics to make sure everyone is on the same page and then we’ll dive into the good stuff.
So what the heck is Customer Lifetime Value?
CLV is the predicted profit you will make over the entire lifetime of a customer.
Sounds like magic voodoo? It can be, but there are also lots of great ways to come up with good estimates and further refine this over time. The main reason why CLV is a big deal is because it lets you determine how much money you can spend to acquire a customer while achieving the level of profitability you are looking for.
How do you calculate Customer Lifetime Value?
While I could walk you through an example I think a picture is worth a thousand words and the kind folks over at KissMetrics made a kick-ass infographic that walks through calculating LTV using Starbucks as a real life example. In future posts I’ll run through some other examples but it hard to start with a better one that this: