The Ins and Outs of Customer Lifetime Value for B2B Industries

CLV explained

The CLV metric measures the total revenue a business can expect to generate from a particular customer over the length of the buyer-seller relationship. This calculation considers both acquisition and retention costs, making it a key metric for understanding long-term profitability.

CLV is about predicting future earnings. It’s a type of predictive data analytic that forecasts a customer relationship’s future value.

CLV and customer retention

Lauren O’Brien, chief revenue officer at VentureBeat, highlighted the importance of customer retention in optimizing CLV. “Customer retention, of course, is key in this game,” O’Brien explained. She noted that her company, a B2B business, maintains nearly 100 percent customer retention; also, it’s reevaluating its pricing strategy based on insights into customer acquisition costs (CAC) and CLV.

“On the flip side, our CLV is huge per customer,” O’Brien continued. “Because of this, our focus on customer retention is critical and almost as important as generating sales.”

Calculating CLV

By definition, CLV isn’t a fixed number. It varies depending on the factors a business chooses to include. However, the following is a commonly used formula for calculating CLV that emphasizes the significance of customer retention and relationship longevity:

CLV = gross contribution per customer x (yearly retention rate/1 + yearly discount rate – yearly retention rate)

While this formula works broadly, businesses often adjust it to suit their specific needs and priorities.

CLV applications

CLV is widely adopted in B2C industries. This is especially true in retail and telecommunications, where companies benefit from analyzing data across large customer bases.

However, the stakes are higher for B2B companies because CLVs can be worth millions per account. Additionally, CLV approaches differ in B2B and B2C industries. For example, in B2B businesses, executives’ judgment and experience are often more helpful and reliable than statistics because they have considerably fewer customer accounts. In contrast, a more statistical approach makes sense for B2C companies with numerous disparate customers.

Why measure CLV in B2B?

Adding another metric to the pile of estimations sales teams deal with can be daunting, especially if it will affect their key performance indicators (KPIs). Still, O’Brien stressed that understanding your CLV — and having the patience to let that value materialize — can completely change your entire customer acquisition strategy. “You would be surprised how you can improve your pricing and sales strategy and accelerate sales by understanding these metrics,” O’Brien noted.

Want to get your salespeople on board? Share the following ways CLV metrics can improve and benefit sales and marketing departments’ efforts.

1. Measuring CLV can help you prioritize client activities.

Understanding CLV allows sales teams to identify and prioritize customer accounts based on their long-term value. This practice prevents disproportionate sales efforts on less profitable leads or clients. By analyzing various accounts’ comparative values, your sales team can focus its time and resources on nurturing high-value relationships.

For example, say customer A has a $200,000 CLV, and customer B has a $10 million CLV. Knowing this, your sales department can more efficiently prioritize nurturing and retention efforts.

Stephan Liozu, chief value officer at Zilliant, explained the unique challenge of applying CLV in B2B. “In B2B, lifetime value takes on a unique dimension, as procurement teams are generally structured to focus on short-term savings rather than long-term value,” Liozu explained.

This highlights the need for sales teams to use CLV metrics to shift their focus from immediate wins to customers who bring sustainable revenue growth. By nurturing these valuable client relationships, salespeople can increase their sales efficiency and reduce time spent on cold calling and prospecting.

2. Measuring CLV can identify underdeveloped accounts.

CLV measurements can yield true revelations for more successful sales account management. You may view an account as mediocre; however, calculating its CLV can show that it’s woefully underdeveloped, with more potential than your team realized.

For example, say your team has made only a few random sales in small batches to customer A. This customer likely hasn’t made an impression on the sales department and isn’t really on the radar. However, when you calculate this client’s full potential for the expected length of the relationship, you may realize it’s actually in the top 20 percent of your business’s accounts. Knowing this, you can rethink the account’s development strategy.

3. Measuring CLV can help you with long-term planning.

CLV’s predictive nature provides valuable insights into a company’s market potential based on its real accounts. It offers a holistic, multidimensional view of growth opportunities — enabling more informed long-term planning.

For instance, calculating the CLV of your entire customer base, strategic accounts, or regional market segments can help you uncover trends and areas for optimization. This data ensures that decision-making isn’t skewed by customers whose short-term value might be insufficient or misleading.

Alex Schlee, founder and CEO of Anamap, highlighted another advantage of CLV. “Used for comparison purposes, CLV also allows companies to find high-value segments of customers and optimize toward getting additional customers from that segment,” Schlee explained.

By identifying and targeting these high-value segments, companies can refine their strategies to acquire and retain customers who contribute most to their long-term success.

Best practices for using the CLV metric

You and your sales team must agree on your CLV measurement approach. Here are some of the most critical points to consider:

1. Assumptions matter when calculating CLV.

Recorded assumptions aren’t hard data. Still, they’re instrumental to CLV calculations at B2B companies because there are so many subjective factors to consider.

Relevant assumptions can cover various factors, including the following:

• The estimated number of projects this particular lead will generate.
• The expected volume of resources that will be needed.
• Whether a customer’s expanded market will cause an upsurge.

These assumptions are part of a sales rep’s CLV formula breakdown, complete with descriptions and quick “justifications” of the variables. With no assumptions recorded, tracking a mistake or misjudgment may be impossible.

2. Consider formalized vs. participatory CLV calculations.

Businesses have accounts of varying sizes. For this reason, introducing two distinct CLV calculation types makes sense:

• Smaller accounts: A CLV calculation for smaller accounts would include a formalized approach with a simple equation. For example, multiplying relationship expectancy by the estimated number of orders a year multiplied by the average order size.
• Bigger accounts: In CLV calculations for larger accounts, judgments should rest on collectively shared opinions by a specially assigned steering committee of senior decision-makers.

3. Ensure you minimize conflict of interest in CLV calculations.

When introducing CLV as a metric for measuring sales force performance, it’s critical to set up realistic quotas. Ideally, you’d set the quota at 80 percent of the actual CLV and 60 percent of the potential CLV. This ratio will encourage sales reps to work on accounts more willingly.

4. Be aware of challenges when calculating CLV.

Mitigating the human factor in CLV calculations can be the most significant challenge. Consider the far-reaching implications of the following situations:

• New markets: In new markets, sales reps may not have the experience and knowledge to have a “gut feeling” about a customer’s CLV.
• New products: It’s challenging to “bulk raise” a CLV measurement for new products. The new CLV can only approximate the reflection of new opportunities.
• Incompatible variables: Making CLV assessments covering different geographies or customer segments with incompatible variables can be challenging. A unified calculation method on a senior level could mitigate this challenge.

Using CLV in sales

For many B2B companies, incorporating the CLV metric into sales strategies can become a cornerstone of corporate CRM policy. The metric has its downsides, such as reliance on human judgment and challenges in areas with high uncertainty. However, its benefits often outweigh these limitations.

By defining individual customers’ contributions to the seller’s revenue streams, CLV helps businesses prioritize accounts. It also helps set better business goals and align resources more effectively. In addition, it can assist sales teams in identifying new opportunities for account development, nurture high-value relationships and foster long-term business growth.

Jennifer Dublino contributed to this article.