Every profession has its jargon; its “TLAs” that give insiders a shorthand. (What’s a TLA? A “three-letter acronym!”) At their best, these save a few syllables here and there when the cognoscenti gather, but they can be a barrier to understanding with the civilians that experts hope to influence.
When your business explores getting more from your customer relationships, you will hear two TLAs in particular—CLV and NPS. Just to make things interesting, note that CLV and CLTV (an FLA!) are the same.
Let me demystify these critical measures for you as you consider how to build more customer 💗 in your work.
TLA: CLV, aka CLTV
What it stands for: Customer Lifetime Value
What it means: CLV is the total amount a customer spends, or the total profit they create for your organization, in their transactions with you over the entire lifespan that you keep them as a customer.
How it works: The core inputs used to compute CLV are—
- Actual or average revenue/profitability per transaction.
- Number of transactions in a defined period, often a year
- Number of the defined periods that the customer interacts with your organization.
If a customer purchases from you once a month, spending $10, the yearly revenue is $120. If you keep them as a customer for eight years, CLV (revenue) is 8 x $120, or $960.
If you know that each $10 transaction generates $3 of profit, CLV (profit) is 12 (transactions in a year) x $3 (profit per transaction) x 8 (years in the customer lifetime), or $288.
Organizations choose which is more useful to measure, revenue or profit, by weighing the quality of their record-keeping, ease of measuring, and the value to the business of precision for decision-making. High-margin sellers may focus on revenue, trusting that there are few overall money-losing transactions or that they are identified and managed via other measures. Organizations with thin margins, such as consumer packaged goods companies, may find profitability more relevant.
CLV is a great number to know because tracking it over time gives a powerful indicator of your organization’s health. I think it’s a thing of beauty because teams paying attention to CLV can set actionable goals for improvement and have clear levers to impact the equation. (This series will grow to explore what organizations can do to increase CLV—hit the “follow” button on LinkedIn or check the blog roll on https://www.3Ccomms.com.)
Stay tuned and check back next Monday when we’ll unpack NPS! Get ready to explore how NPS works and how it correlates with CLV. Drop a 💗 if you’re as fired up as me!