There are plenty of acronyms floating around the analytics space. It can be hard to keep track. Even with predictive customer metrics, we have LTV, CLV, pLTV, LTR, CLV:CAC, and many more. One question that keeps popping up is: is there a difference between CLV and LTV?
In short, the answer is no. CLV was an acronym coined by Peter Fader to identify the specific type of LTV he was talking about. However, since then at Retina we have tried to give these terms actual meaning and here is how we think about it.
What is LTV?
Lifetime Value (LTV) is the lifetime spend of customers in aggregate. LTV is an aggregate metric, unlike CLV, which is calculated at the individual customer level.
What is CLV?
Customer Lifetime Value (CLV) is a metric that estimates how much value (usually revenue or profit margin) any given customer will bring to your business over the course of the total time they interact with your brand—past, present, and future.
You can read more about customer lifetime value in this CLV Academy lesson.
Why should you choose CLV?
It’s important to calculate CLV at the individual level because your customers are individuals who are different from one another. You need an individual CLV prediction for each one if you’re going to use this metric to its fullest potential.
Aggregate CLV simply does not allow you to adjust who you’re targeting with re-engagement or acquisition efforts to maximize the benefits of each campaign. A good CLV model assesses the commonalities of all the customers unique to your business, then combines that information with per-customer behavior in order to predict future purchases and future dollars spent with your brand.
But developing a CLV model provides more than just one useful metric. In the process, you can discover the most important features that indicate higher or lower customer value. Features are personal attributes that can be based on behavioral or demographic information, like whether or not someone opened an email on a Thursday, or what IP address they typically purchase from when shopping online.
How can you use CLV?
By calculating lifetime value at the individual customer level, you can utilize the metric across your business. All of the follow use cases require individual CLV metrics:
- Facebook audience generation
- LTV cohort analysis
- Customer service ticket ordering
- LTV marketing lift
- CAC bid capping marketing
- Retention campaign prioritization
- Discount campaigns for high LTV customers
- Enhanced buying experiences for high LTV customers
- Loyalty programs
- Segmentation for marketing
With Retina’s CLV framework, you can transform your approach to not only marketing, but sales, product, finance, and more. Read our whitepaper to learn more about we calculate customer-level lifetime value early in the customer journey. This means you can stop relying on aggregate lifetime value. And, you can stop waiting for four or more transactions to calculate CLV.
CLV for Finance
In 2020, we interviewed executives from leading investment banks to learn more about how they think about and use customer lifetime value. We commonly see the finance sector using LTV, but merely as an aggregate metric. What if we expanded the use of lifetime value in the finance space to include CLV at the individual level?
From the interviews, we gleaned the following insights.
Not surprisingly, many of the executives expressed that CLV will be the most useful in the retail and ecommerce space. Some interviewees expanded this view to include portfolio companies of private equity firms as well. With repeat purchase behavior and oftentimes loyalty or rewards programs, retail and ecommerce are a natural fit for CLV-based strategies.
On the finance side, predictive customer metrics like CLV can help companies get a better valuation when seeking investment opportunities. For example, if a company “fires” its bad customers prior to calculating CLV:CAC ratios, they will project a more favorable, truthful view of the company’s future potential. You can read more about this exact strategy in our recent blog post.
During the past year, we’ve seen some businesses falter during the pandemic while others have thrived. Retail and ecommerce brands that have embraced changes like virtual shopping experiences, curb-side pickup, and enhanced loyalty programs, are reaping the benefits. One finance executive expressed that tech-savvy businesses would be more likely to succeed with CLV strategies.
If you’re interested in learning more about how to use customer lifetime value to measure the health of your business, check out the Quality of Customers Report.
When it comes to lifetime value, calculations at the customer level make all the difference. When you shift your North Star metric from the aggregate LTV to the individual-level CLV, you can instantly expand its power.
From marketing use cases like campaign budget optimization and lookalike audiences to finance strategies like valuation and customer equity measurement, customer lifetime value can drive strategies across your business.