Customer Lifetime Value (CLV): What Is It & How To Calculate

4 Min Read

In the world of marketing metrics, understanding customer lifetime value (CLV) is pivotal for businesses aiming to optimize their strategies for long-term success. By calculating this metric, businesses can make informed decisions about marketing expenditures, customer retention strategies, and overall resource allocation.

In this article, we’ll cover the intricacies of CLV and provide a step-by-step guide on how to accurately calculate this essential marketing metric.

What Is Customer Lifetime Value (CLV)?

Customer Lifetime Value (CLV) is a marketing metric that determines the overall average amount of revenue a customer provides. In other words, it measures the profit your company can expect to earn over an entire relationship with a single customer.

Sometimes referred to as lifetime value (LTV), calculating your customer lifetime value is an important step in fully understanding your customers, as well as making decisions regarding sales, performance marketing, and product development.

Importance of Customer Lifetime Value

Customer lifetime value provides a range of benefits to marketers, which are as follows:

• Business Forecasting: CLV allows businesses to forecast future revenue based on existing customers, aiding in budgeting and planning.
• Resource Allocation: Understanding CLV helps businesses allocate resources more effectively, ensuring high-value customers receive the attention they deserve.
• Marketing Spend: By knowing the CLV, businesses can better allocate marketing spend, investing in acquiring customers that are likely to generate more revenue in the long run.
• Customer Retention: CLV emphasizes the importance of customer retention, underlining the fact that maintaining existing customers can be more profitable than acquiring new ones.
• Profitability Analysis: CLV is a critical metric in evaluating a company’s profitability over time, which helps in making informed business decisions and strategic planning.

Calculating your CLV will help your company clearly define your goals regarding marketing and sales strategies. This will ultimately improve many elements of your long-term customer relationships by reducing acquisition costs and increasing retention of the customers who provide the most value to your company.

Again, not all customers are equally valuable. So calculating CLV will allow you to increase profit by dedicating more effort and resources towards your higher-value customers.

How to Calculate Customer Lifetime Value

The customer lifetime value calculation is a projection rather than a metric based on hard numbers, so in order to measure the relationship your business has with a customer, you will have to make informed assumptions.

Customer lifetime value is calculated by multiplying the average time spent as a customer with the average revenue they bring in on a monthly basis. One CLV formula you can use as a baseline for this metric is:

CLV Formula

CLV = Average Customer Lifetime Span * Average Customer Value

An Example of How It’s Used

For example, if a customer spends $100 per month, and continues their relationship with your company for 10 months, the lifetime value of a customer would be $1,000. One thing to keep in mind is that CLV does not take operating expenses into account. However, it does include customer acquisition costs and any other marketing expenses that went into that particular customer. 

What Is a Good Customer Lifetime Value?

A good customer lifetime value will depend on your company, industry, and products. It can often be useful to compare any new CLVs against old ones; if they are larger, it can indicate better customer retention. The higher your customer lifetime value, the better﹣high CLVs show that customers love your products, are spending money on them, and staying with you long term.

Another factor to consider is your cost per acquisition, which indicates how much it costs to get a single customer. The lower your CPA is compared to your CLV, the better your campaign is performing.

Strategies to Improve Customer Lifetime Value

Improving customer lifetime value is crucial for enhancing business profitability and customer loyalty. Here are five effective strategies:

• Personalized Marketing: Tailor marketing efforts to individual customer preferences and behaviors to increase engagement and satisfaction.
• Loyalty Programs: Implement rewards programs that incentivize repeat purchases and foster long-term loyalty.
• Exceptional Customer Service: Provide outstanding support to resolve issues quickly and build trust with customers.
• Product Upselling and Cross-Selling: Encourage customers to purchase additional or higher-end products that complement their previous purchases.
• Customer Feedback: Regularly collect and act on customer feedback to improve products and services, ensuring customers feel valued and heard.

Customer Lifetime Value (CLV): Final Thoughts

Wrapping up, customer lifetime value is a critical measure that encapsulates the total worth of a customer to a business over the entire span of their relationship. Understanding and correctly calculating CLV is crucial as it assists in making informed business decisions, designing effective marketing strategies, and ultimately improving long-term business profitability.

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