Customer Lifetime Value (CLV)
What is customer lifetime value (CLV)?
CLV refers to the total profit a company expects to earn from a single customer throughout their lifetime. This knowledge can help companies develop strategic advertising and email marketing campaigns, make sound financial decisions and determine how much should be invested in acquisition efforts. This is why it’s one of the most important marketing metrics and a key part of many companies marketing strategies.
While CLV can be difficult to calculate, it’s certainly possible, and knowing how to do so is necessary for succeeding in today’s business environment.
Why is CLV important?
CLV helps companies make evidence-based business decisions by understanding customer value and worth. It provides invaluable insight into target markets, which is crucial for creating smart marketing campaigns. Ultimately, this results in increased profitability and longevity.
CLV helps a business understand:
The demographics of its most profitable customers. CLV allows you to segment your customers into different categories based on their average CLV, or “lifetime,” with your company.
Where to direct more of its marketing budget. Companies typically spend more money marketing to customers with higher CLVs.
How much it needs to spend to acquire new customers.
The likelihood of buyers becoming repeat customers. Along with spending habits and behaviors, CLV helps companies best tailor their marketing efforts and products to existing customers. This is incredibly important for maintaining customer loyalty and overall business success. In fact, according to a study by Harvard Business School, increasing customer retention by just 5% can result in an increase of company profits by 25-95%.
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How do you calculate CLV?
Determining CLV can be a complex process depending on each individual business as well as the product that it sells. Companies selling a variety of items with mixed markets may have a more difficult time calculating CLV because of the abundance of factors to consider.
However, the basic CLV formula is as follows:
Average amount spent x frequency of purchase x customer lifetime = CLV
For example, let’s say the average customer sale of an upscale makeup company is $150. If a makeup product lasts for approximately two months, then you can expect each customer to spend $150 six times a year. Let’s accept that a company assumes this customer will buy repeatedly for 5 years.
This would result in a CLV of $4,500.
Once you have this figure, you can analyze profits, draw important conclusions and make comprehensive business decisions that will ultimately boost your bottom line.