Handy Little Tool for the Recession: Customer Lifetime Value Ratio

As I visit with fellow marketing executives around the globe, something that they frequently discuss is their need for employees who have the ability to effectively and accurately measure the ROI on any given initiative. Having been a corporate accountant in a former life, I’m a big fan of Marketing Return on Investment (MROI) in making marketing decisions.

Although there are many measurements that provides good actionable data, one of my favorites is the Customer Lifetime Value Ratio (CLV). But don’t be intimidated by the name – this is relatively simple stuff that might help you keep your current job or help you land your next one.

In simplest terms, CLV is defined as the net present value of the annually recurring revenue generated by a customer minus the customer acquisition costs and customer maintenance costs. Unless your company has been in business long enough to obtain the actual customer churn rate, some suggest you are safe using a horizon of 3-5 years in your calculations.

I like this measurement because it is somewhat comprehensive in its reach. It gives me the following:

• A better picture of the true cost of customer acquisition (which of course includes things like time to close)
• A better measurement of customer loyalty program ROI
• The actual customer churn rates – a benchmark against which we measure future progress
• As I make tweaks to marketing, this helps me optimize our marketing efforts. When you combine this with analytic (like those from Omniture), you really begin to have a wealth of information at your fingertips.

Related to this are things like Customer Acquisition Cost Ratio (how long it will take a customer to payback their acquisition costs), Average Deal Size, Close Rates, Discount Rates, etc.

If the recession has not yet caused you to really understand these measurements, now may be a great time to bone up on your reading. I recommend the following sources:

Haut Tec: http://blog.sciodev.com/2009/02/10/saas-metrics-saasonomics-101/
Wikipedia: http://en.wikipedia.org/wiki/Customer_lifetime_value