Customer Lifetime Value (CLV)

7min read

What is CLV (Customer Lifetime Value)?

CLV is the amount of money a customer is predicted to spend with your business for the duration of your relationship with that individual. It’s an important metric, and the way you approach it can both define your business and could vary significantly depending on what you’re trying to get from your business.

More than just a simple exchange of goods for money, CLV is a measurement of how valuable a customer is to your business over time. Of course, not all customers are valued equally. And because it’s less expensive to keep existing customers than it is to find new ones, keeping your CLV high can be essential to the success of your business. After all, a higher CLV means that you have more loyal customers.

How to calculate CLV

So, how do you measure CLV? You can estimate your Customer Lifetime Value with the following steps:

  • Forecast a customer’s lifecycle with your business

  • Estimate future products purchased to forecast future revenues

  • Estimate the costs associated with producing and delivering future products

  • Calculate the current value of those revenue amounts

  • While the process can seem intimidating, breaking it down into manageable steps can help.

A step by step guide to calculating customer lifetime value

In order to determine your CLV, you’ll need a few things:

  • Average purchase value: Divide your company’s total revenue in a time period by the number of purchases in that same period.

  • Average purchase frequency rate: This represents the average amount of orders from each customer.

  • Customer value: Determine this number by multiplying your first two calculations: average purchase and average purchase frequency.

  • Customer lifespan: This is the length of time a customer relationship typically lasts before that customer disengages from your business.

  • Forecast revenue: Using the information you’ve determined in the first 4 steps, you can estimate how much revenue you can expect from an average customer. Simply multiply the customer value by the average customer lifespan.

Why CLV is important to your business

Customer Lifetime Value determines the financial value of each of your customers. In and of itself, that’s an important purpose. But CLV is also unique in that it can look forward, as opposed to a concept like customer profitability, which measures past activities in order to gain insights. Much like you should always be looking into the future to determine which products you should sell, various ways you can optimize your business, and how you might serve your customers better, CLV can forecast future activity to improve your bottom line.

 

So, what can you do with Customer Lifetime Value? And why should you care?

Advantages of CLV

Specific advantages of understanding Customer Lifetime Value include:

  • CLV allows you to measure the financial impact of marketing campaigns, initiatives, and other activities.

  • That, in turn, will help your company align and ladder up to bigger financial targets in an organization—or start creating them if you’re a smaller operation.

  • CLV can also change the way you think about marketing in terms of creating loyalty objectives or focusing spend on underutilized areas.

  • CLV will help you find balance in terms of short-term and long-term marketing goals and demonstrate a better understanding of financial return on your investments.

  • CLV encourages better decision making by teaching marketers to spend less time acquiring customers with lower value.

  • And the bottom line? Effective management of your customers relationships, which leads to increased profitability—that’s perhaps the most obvious advantage of Customer Lifetime Value.

In summary, there are plenty of reasons why you should learn more about Customer Lifetime Value and apply it in your business. When you consider the fact that it represents the literal value of a customer, it only makes sense to devote marketing spend toward implementing it.

Why customer lifetime value matters

Optimize your customer lifetime value (CLV). By doing this, you may realise that you’re spending huge sums on acquiring customers because you haven’t made enough of an investment in your loyalty programs. For example, if your customer acquisition cost (CAC) for a net-new customer is 30% of your first sale, then it makes sense to provide discounts and promotions to your past customers at 10-20%. You’ll need to think differently about how you measure and attribute various programs.

 

Vanity advertising metrics and surface-level attribution models, such as last-click, need to be replaced with more comprehensive forms of measurement. It’s vital to make an investment in truly understanding your CLV and separate out the cost per acquisition (CPA) for new and repeat customers. You’ll probably find that you’re burning a lot of dollars that you could be sharing with your customers via loyalty programs, and driving faster, more sustainable growth.

Here are some more reasons why Customer Lifetime Value matters:

  • Helping to determine customer segmentation

  • Measurement of customer loyalty

  • Determining efficacy of marketing strategies

  • Aiding in judgment of product quality

  • Increasing profitability overall

Or, as Business.com writes, “CLV can safely be called the most complete metric for marketing analytics. New customer rates, costs per order, customer retention rates, conversion percentages and many more are important to your future revenue, but CLV combines all the important statistics of every individual customer. It is simply the expected profit you get from each customer in your business.

 

With proper calculations, you can easily grow your  business with this metric. You won't be losing money, because you will know exactly how much you earn.”

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