Customer Lifetime Value: A Step-by-Step Guide

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According to research, the top 1% of your customers spends 30x more than your average customers. That means if you draw a line dividing customers into the top and bottom halves — one of your very best customers will spend more than everyone below the line added together. As a consequence, you want to acquire someone who will become one of these big shoppers.

To find the campaigns which net the best ROI, you need to know which campaigns are attracting the most profitable customers. In other words, they are people with high Customer Lifetime Value (CLV). CLV is the single most important metric you have to evaluate marketing performance. It’s defined as the sum of all the purchases a customer makes with you. By incorporating this metric into your ROI calculations, you’ll find the campaigns that help you acquire your most profitable customers.

But your ROI calculations might be wrong. WHY?

The traditional ROI formula isn’t good enough because it measures revenue based on first transaction alone.

ROI = (dollars in revenue)/(dollars spent) – 1

These figures don’t incorporate the full purchase history of customers acquired through each campaign. This makes it impossible to tell which campaign is bringing in your most profitable customers. You want your ROI calculations to include the full Lifetime Value of customers.

Then how to calculate ROI the Right Way?

Fire up your spreadsheet and get ready to calculate ROI the right way. And the following is a step-by-step guide to do so.

1. Grab the information you’ll need

Ad Spend Data by Campaign: Most ad platforms give you the ability to export data on campaign performance and spend. Unfortunately, you’ll have to download each report separately and combine them by hand if you use multiple ad platforms.

Order Data: You order data is likely sitting in the same source as your customer data. Make sure you can get your hands on it and that it includes order amount and order date.

Customer Data: (including customer acquisition source and campaign) You probably have access to your customer data; you’ll also need to know the acquisition source for each of them.

2. Organize your spreadsheet

You’ll want to set up four tabs in your spreadsheet. The first will include your ad spend data, the second will include customer data, the third will be orders data, and the fourth will be where you’ll conduct your ROI calculations. Here is how each of these tabs should look:

3. Calculate CLV for each customer

In the customers tab use this SUMIF statement to calculate the CLV for each of your customers

=sumif(orders!$B$2:$B$1001,A2,orders!$C$2:$C$1001)

4. Calculate spend for each campaign

In your campaign performance tab use this SUMIF statement to calculate spend for each campaign

=sumif(‘ad spend’!$B$2:$B$121,A2,’ad spend’!$C$2:$C$121)

5. Calculate CLV by campaign

In your campaign performance tab use this SUMIF statement to calculate spend for each campaign

=sumif(customers!$B$2:$B$29,A2,customers!$C$2:$C$29)

6. Calculate ROI for each campaign

Now comes the fun part. In your campaign performance tab, use this formula to calculate ROI for each campaign

= (C2-B2)/B2

The Results

With this data, you can allocate your marketing budget with confidence. You’ll know that the money you spend won’t just be bringing in one-time buyers, but lifetime customers.

The best way to keep your customers with you is to listen to them. It’s always good to do so. Your customers might give you valuable ideas that you and your teammate haven’t thought about. And they will let you know what their budget to the goods is, so that you can balance and a better understand on the demands. PrestaMonster.com understands the significant contribution of customers to a business, especially an ecommerce, so it provides you the tool named Quick Quote Tool Pro which is able to support your customer service.

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