Jan 292018
 

Using CLV to determine Marketing ROI

Let’s assume that:

  • the average customer acquisition cost for a company is $100
  • the average annual profit for this customer cohort is $60
  • and the average customer lifetime is three years.

The firm determines that the profit contribution is $180 before consideration of the initial acquisition cost (which means that CLV =$80).

In this case, the marketing ROI is ($80 / $100 = 80%). In other words, the marketing department has turned $100 into $180 by acquiring new customers.

Using Marketing ROI Instead of CLV

This approach may be preferred to the standard marketing ROI calculation because it looks at a longer time horizon. Let’s look at the same situation above, but this time only looking at a one-year horizon:

  • Average acquisition cost = $100
  • Average customer profit per year = $60

BUT the average customer lifetime period of 3 years is NOT considered in marketing ROI, because with a marketing ROI calculation, we generally only consider incremental results on a short-term basis, such as the first year only in this example.

This would mean that the marketing ROI would be calculated as:

  • Marketing ROI =          (Improved profits less marketing costs)/marketing costs
  • Marketing ROI =          ($60 – $100)/$100 = – 40%

When only ONE year is considered in marketing ROI (which is common practice when measuring a campaign with short-term results, then the ROI in our example is negative 40% – that is, we lost money for the firm.

The CLV calculation however, shows that the campaign had a positive contribution because profits from these customers continued for a further two years on average.

This means, particularly for marketing campaigns that deliver long-term results, calculating customer lifetime value will provide a better evaluation of marketing performance.

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