Predictive customer lifetime value has applications across marketing, sales, product, customer service, and more. Most of these use cases require a model that calculates CLV at the individual level. (See Course 1, Lesson 2 for an explanation of the importance of customer-level lifetime value metrics.)
Marketing Use Cases
Once you’ve calculated CLV, you can use it to determine your target customer acquisition cost (CAC). Instead of simply targeting customers that bring in high initial revenue, focus your targeting and acquisition efforts on high CLV customers. Even if some of their first purchases might be small, they will bring your business more value in the long run.
More specifically, a customer acquisition is unprofitable only if their acquisition cost exceeds their lifetime margin—not just the margin of their first purchase. For most businesses, it makes sense to keep a CLV to CAC ratio around 3:1 for each marketing segment. Spend too much (like a 1:1 ratio) and acquiring these customers won’t be profitable. However, spend too little (like a 7:1 ratio), and you’ll be missing out on profitable customers whose acquisition cost is above your current bid cap.
Learn more about lookalike audiences in the next lesson.
In the course of their customer journey, many customers will feel unsure if they will purchase from your business again. In that key moment of indecision, successful customer outreach can pivot a customer’s journey from the possibility of churning to long-term retention. However, placing that exact moment is often left to guesswork.
You can use customer-level churn predictions to identify customers who are just starting to be at risk of churning. Reaching out to exactly those customers at the right time boosts retention far more effectively than sending an impersonal mass email.
With individual level CLV metrics, sales teams can focus on customers with the highest lifetime value. The greatest mistake in sales prioritization is to let high CLV customers fall by the wayside while your sales team focuses on closing low CLV leads. Empowered by CLV insights, sales teams can finally avoid this painful inefficiency. Sales reps can prioritize follow-up activities by customer CLV to ensure they reach out to the most profitable new customers first. Further, sales reps can spend more time communicating with high CLV leads, while keeping low CLV communications short.
CLV data can also illuminate which products inspire repeat purchases and which products spell the beginning and end of a customer’s journey. Focus on those products correlated with high CLV: feature the products prominently on websites, social media, and advertising to extend customer lifespan and boost sales overall. Find out why your high CLV customers favor those products. Do they have a feature that people love? Is that product your brand’s flagship experience? A customer’s first product experience with your brand will make or break their trust in you. Always strive to have new customers start with a great product.
For products associated with low CLV, it may be that a poor product experience is driving customers away. Consider retiring those products to avoid bad customer experiences that don’t represent your brand’s high quality standards. Keep in mind that those products may not be profitable after accounting for their impact on lifetime value, especially if you’re also spending budget to advertise them. Retiring products will save costs on inventory and allow your team to focus on higher CLV products or future development.
For products that don’t significantly impact CLV either way, dig into customer reviews and survey responses to see how the products can be improved. Whether it’s product design, customer support, price, or another factor, spend time and budget making improvements to boost the associated CLV for these products.
In customer service, it’s important to focus on customers that are likely to churn soon as well as customers that are the most valuable to your business.
Customers with high CLV are likely to stick around for a long time and potentially spend much more with your brand. If one of them has a problem, it needs to get fixed immediately and diligently.
You can use the unique CLV and anticipated churn date associated with every customer individually to prioritize their customer service tickets.