CLV: The metric that means money

Marketing departments have near-term and long-term responsibilities to the corporation. Near term is entirely driven by the needs and maturity of marketing operations. Long term, marketing is responsible for developing the intelligence, systems, and processes to drive continuing viability and profitability.

This is the first in a series of articles exploring aspects of this responsibility, and how to succeed.

There are four phases of B2B marketing maturity. Here is each one with its goals, with each phase being additive.

1. Market introduction. Marketing must generate interest, leads, and an initial core of customers through program and product-driven campaigns. Positioning is a line in the sand and everything is refined from here. The basic tools of marketing must be developed quickly to put the company on the map.
2. Every working day begins with the question, what’s the net new? All efforts are channeled to filling the lead funnel and building an effective sales capability. All are concerned with lead flow and conversion rate.
3. Developing a measurable, repeatable onboarding process that turns sales into customers. CX may administer and implement the process, but it should be developed as a coordinated marketing program.  
4. The focus is now on customer satisfaction and retention, adding in longer-term initiatives aimed at nurturing deeper and wider relationships.

The metric of Phase 4 is the metric that means money — customer lifetime value (CLV). The variables are the span of the relationship, as measured in years and dollars. Business viability and profitability hang in the balance. This is the prize that marketing is working towards

The cost of customer acquisition

When thinking about long-term profitability, I for one, would like to overlook the cost of sales as an annoying nit, but I can’t.

The customer acquisition cost (CaC) has to be paid back before the customer is profitable. For SaaS companies, the income is the yearly subscription. Many of these companies have a high CaC as they are starting or ramping up, so the amortization period can approach two years. If the customer leaves before the CaC is amortized the company loses money.

To get your arms around your CaC, let’s do some simple math. Getting a customer is obviously a product of marketing and sales activity, so take the yearly marketing and sales costs and divide by 12 to get the cost per month. Then take that figure and divide it by the number of prospects that converted to customers within that month (or the yearly total divided by 12). Here’s a “for instance”:

• Marketing and sales costs/month = $50,000
• New customers/month = 100
• CaC = $500

Here are three strategies that decrease the cost of acquisition by increasing the effectiveness of marketing and sales.

Research. What is it that these annoying prospects actually want? Qualitative (Voice of the Customer, persona-based) research will give you a window into the company’s decision-making process and the individuals who are part of it. Understanding what prospects are looking to buy will significantly increase marketing and sales effectiveness.

Ideal Customer Profile. Not every prospect turns into a long-term relationship.  You need to have a clear picture of the customers that do stick around and prospect for those. To be sure, this may increase the CaC, but it also increases profitability.

Playbooks should incorporate this research into a sales structure that brings the best thinking to every rep. This will have a steadily increasing effect on conversion, driving down the CaC.

Customer Lifetime Value. CLV is a simple concept with profound implications. In my experience, few marketing organizations and companies can optimize CLV. It takes clarity and commitment, which is not the game if you’re looking for a three-to-five-year flip. 

Customer marketing must be supported

I have also encountered organizations that give lip service to the notion of customer marketing but fail to support it with investment. 

I was once giving a presentation on this topic when someone said, “No one spends money on existing customers.” A seasoned executive responded, “They do if they want to be in business a long time.”

Dig deeper: MarTech’s B2B marketing experts to follow

Churn rate is a key concept with CLV — it’s essential to understand your customer churn rate (as a percentage of your customer base). First, it will tell you the success (or not) of customer loyalty measures. Second, it can help refine your ideal customer profile. Who is staying and why? Who is leaving and why? What are the firmographics (such as the industry and size of the companies? Who are the personas involved?  

Third, and this is a big one, if you see the churn rate accelerating, pull the alarm because the house is on fire.

Calculating the CLV

It’s also helpful if you calculate your CLV, maybe not as precisely as a CPA would, but with this relatively easy “back of the envelope” calculation. 

Divide the number 1 by the customer churn rate. Let’s say the churn rate is 5%. 1/0.05 = 20. This is the customer lifetime rate.

Dividing total sales by the number of customers will yield the average sales per account. Let’s say total sales are $1,000,000 and there are 500 customers. The average revenue account would then be $2000.

Last, multiply the customer lifetime rate (20) by the average revenue per account ($2000). CLV = 20 x $2000 = $40,000.

Looking at each year, and year over year, gives you a picture of your growth, or not. CLV pulls no punches. It’s a dry-eyed indicator of what you need to do next. 

CLV is the metric that means money.

Inside the cacophony that is every marketer’s every day, it’s easy to become overwhelmed by the tyranny of the urgent. But it’s your responsibility to look ahead, to your company’s future.

Understanding, calculating and using CLV is a critical success factor, if the prize you’re looking for is long-term profitability.