What Is Customer Lifetime Value (CLV)? The Complete Guide

Customer lifetime value is a key business metric that measures how much a business can make from a specific customer during their relationship. Calculating the CLV depends on the product, purchase frequencies, cost, and purchase volumes.

Understanding CLV enables you to make informed marketing and sales decisions. This guide explores customer lifetime value, how to calculate it, and everything you must know about CLV as a business owner or manager.

What's Customer Lifetime Value?

CLV is a measure of total revenue a business can generate from a specific customer as long as that customer remains the company client. This differs depending on the product or service a company offers.

For example, a company that sells a product that can only be bought once in a lifetime has a CLV equal to the sale price of the product with future maintenance costs. A brand that provides recurring services has a CLV equivalent to the amount of money a customer will spend on that one service over the business relationship period.

For an in-depth look, you may break your CLV by customer or quartile segmentation. This helps you get an insight into what's working tremendously with high-value customers so you can use that success in your entire customer base.

Determining your CLV will give you insights into your business health. Frequent CLV evaluation will also provide vital information on market fluctuation and customer loyalty.

After understanding the elements influencing your CLV, you will take a strategic view of your business and pinpoint areas you must focus on boosting your return on investment (ROI) to help your business thrive.

Why is the CLV Important?

Here are vital reasons why you should focus on your brand CLV:

1. It influences your revenue

Calculating your CLV is a crucial element of your business. The information you collect from calculating your CLV enables you to tend to your current customer base's needs. After identifying ways to increase the retention time period or every customer's number of translations, you will notice an increase in your CLV and revenue.

2. Cuts customer acquisition cost

Acquiring customers can be expensive, and if buyers only make one purchase, then they never return, the cost of acquiring new customers will add up. However, keeping track of every customer and learning how to increase their relationship length with your business will ensure the cost-acquiring buyers won't disorganized your business.

3. Boosts retention and loyalty

 Retention and loyalty fall under retention period and time and how often a customer takes action. Expanding these aspects will provide more value. Remember that the more loyal the customer is, the higher the number of positive reviews and referrals, and the overall sales increase. People trust their peers' opinions, so allow your customers to vouch for you.

4. It helps in targeting your potential customer demographic

Your information about your target demographic lets you communicate with them effectively. Knowing how much a customer is will enable you to formulate a strategy that will target these customers.

You can achieve this through promotions or deals that help you attract a target demographic or a loyalty program that will make your loyal customers feel more valued. Knowing the right strategies to use will help boost your business.

5. Helps to pursue the best customers

Since customer acquisition is quite costly, knowing your best customers is crucial. Pursuing a customer willing to spend more on your product increases acquisition cost and significantly decreases customer lifetime value.  

Having historical data enables you to identify your highest-value customers so that you may add your acquisition efforts where you get the best result.

Advantages of CLV

Let's explore the CLV benefits:  

1. Improve customer retention: the biggest CLV is boosting customer retention and eliminating customer attrition. Tracking this data with accurate segmentation will help you know your best customers and what works best for your business.
2. Encourage higher-value sales: Netflix improved CLV via higher pricing but realized increasing costs could scare off long-term subscribers. So you should balance to succeed.
3. Drive repeated sales: many businesses have a loyal customer base that keeps coming repeatedly. You can use CLV to find an average number of visits annually or over a lifetime and use that information to create strategies to increase repeat business.
4. Increase profitability: a higher CLV means bigger profits. You should see the impact on your profit margin by keeping customers long and building a business environment encourages them to increase spending.

CLV Challenges

It's hard to measure: without a quality tracking system, it can be challenging to calculate CLV. You need a customer relationship system or enterprise resource planning to make this data available on an automated dashboard that monitors KPIs.

High-level results can be misleading. While using CLV data can be helpful, it can also be deceptive in customer segments. Breaking down data by segments like location and customer size may provide useful data.

Steps to Measure CLV

Let's explore four ways that you can measure CLV:

1. Calculate average order value: Start by calculating the average sale value; if you haven't kept this data long, use a one or three-month period to represent full-year data.
2. Measure customer retention: Look for how long the average customer has stuck with your product.
3. Add the average number of transactions per period to calculate how often customers enter your business. Note that frequent visits are the primary driver of CLV.
4. Calculate CLV

How to calculate CLV?

Calculating CLV is simple, but requires knowledge of your business statistics.

Here is the formula

CLV= Lifetime value x net profit margin

Here is a formula for calculating the lifetime value and profit margin you use to determine CLV.

Lifetime Value= Average value of sale x Transactions numbers x Retention time period

For example: Lifetime Value= (Average value of sale) $7 x (Transactions numbers)50 x (Retention time period)3=$1050

Each of these inputs is vital in growing your CVL. However, each move your business makes may have unexpected consequences that affect your CLV. For instance, increasing your brand price may boost average transaction size but cause your customers to shop less or look for cheaper alternatives.

Ways to Improve CLV

There are numerous ways a company can adapt to improve its CLV. Let's explore them:

1. Customer loyalty/ reward programs

Loyalty programs keep customers engaged, and rewards encourage frequent purchases. Examples include restaurant punch cards and airline frequent traveler programs. Incentives can also motivate customers to return for a repeat purchase.

2. Boost customer onboarding

Some customers purchase from a brand and don't know the next step. Successful businesses outline a course for their customer relationship with time. Making a one-time customer into a recurring customer is vital for business growth.

3. Customer experience

 Your storefront website or call center is part of the customer experience. If your existing customers enjoy the shopping experience, they will likely return for a recurring business.

4. Improved customer service

Poor customer service results in CLV falling quickly as your customer leaves for competitors. So, you must focus on excellent customer service interaction to enhance customer loyalty. You can use CRM systems to place these interactions in a centralized location for streamlined management.

5. Customer engagement

If your business monitors all interactions between the customers and the company, you can identify ways to boost customer experience and loyalty. This should include channels such as customer support, advertising, and sales.

6. Customer relationship management

As a business owner, you must understand the history of communication and customer relationships in sales, marketing, and customer service. The CRM and ERP systems allow you to track and boost these relationships by creating information across the customer lifecycle from lead, support, renewal, fulfillment, upsell, and sales orders.

7. Invest in tech and software

Technology automates processes, monitors them, and centralizes your business data. Although some companies still use basic tools like spreadsheets, email, and contact databases to monitor this data, it is recommended that packaged software suites be used to work out these functions.

8. Customer feedback loop

If your customer has a bad experience, make sure you resolve it. Don't rely solely on customer service to resolve the issue; continuously seek customer feedback to boost the customer experience. Continuous product iterations and fixes may resolve problem areas to enhance customer satisfaction.

9. Upsell and cross-sell

It's easier to upsell to your current customer than acquire a new one. Upselling and cross-selling strategies are tailored to encourage existing customers to purchase more expensive items instead of a lower-cost option.

10. Increase pricing

If done properly, a price hike can increase your CLV as long as you aren't scaring off customers with huge price increases. Before doing that, consider your competitor's pricing. If you focus on value and give your customers unique products or services, you may increase prices without losing customers.

11. Targeted content

Content marketers use content to educate and entertain potential customers to build trust and loyalty. The most used form of targeted content includes e-books, blog posts, etc., tailored to resonate with a specific customer segment.

12. Handling returns becomes easy.

When the customer is unsatisfied with your product, the return process can make it difficult to determine whether you will keep or lose the customer for good. So, ensure a painless return process, and your customer will come back again.

13. Simple purchasing process

Online businesses use cart abandonment rate metrics to determine the number of customers who leave before making a purchase. This could result from an in-person buying experience where many options and packaging turn off the customer. Therefore, you should make a straightforward purchase to capture every sale.

14. Social media

Get your customers' attention on social media platforms like TikTok, Facebook, Instagram, and Twitter. These channels are the best place to market and interact with your customers.

Final Thought

Calculating your CLV gives you an insight into your business. Through the component calculations, you will know where your brand is performing well and where it needs a boost. You will understand how to increase it to prolong business relationships with your current customers.

You need to improve CLV to get more value from every customer and help to reduce the acquiring cost. Whether focusing on enhancing your CLV or reducing customer acquisition cost, ensure your customer acquisition cost is lower than your CLV. Kindly contact one of our experts here if you have questions about Customer Lifetime Value (CLV)