What is Customer Lifetime Value (CLV)?
Customer lifetime value (CLV) is the total amount of revenue a business expects to generate from a customer while their relationship lasts. This metric helps businesses understand how much to invest into acquiring and retaining customers, as well as into other parts of running the business.
Customer Lifetime Value (CLV) FAQs
What is an Average CLV?
An average customer lifetime value (CLV) is the average amount of money a business expects to make from the sale of goods or services to each buyer during the customer’s lifespan. It is a metric that takes the average customer purchase value, average purchase frequency, and average customer lifespan into account.
Why is Customer Lifetime Value Important?
Generally, the CLV is a crucial metric that gives you a deeper look into your business’s current and future revenue generation. It helps you predict or work on potential growth. More specifically, however, identifying your CLV helps in:
Better Targeting of Ideal Customers
By segmenting customers and identifying the CLV for each segment, you easily recognize the types of customers that spend the most on and stay longer with your business. This data then tells you which individuals to target more during marketing campaigns.
Increasing Revenue Over Time
Putting more focus on marketing to high-value targets allows you to make more revenue from your conversions in the long run.
Identifying Customer Churn Risks and Issues
During your CLV calculation, you dig out data on the number of customers you get, how fast these customers leave you, and the number of customers that leave over a short period. With this data on your churn rate, you determine your business’s sustainability, identify the types of customers that contribute the most to your churn rate, and also know what issues to fix to reduce it.
Improving Customer Retention
By fixing issues that lead to relatively low or reduced customer lifespan, you increase the number of customers that remain with your business.
Boosting Customer Loyalty
Retaining customers within your business builds close familiarity with your brand and this familiarity breeds customer loyalty.
Maintaining Subscriber Recurring Revenue Streams
For businesses that operate through the subscription model, having data on your CLV and adequately optimizing it allows you to retain more subscribers for a longer period.
Reducing Customer Acquisition Costs
When you recognize what makes customers leave, instead of spending money on acquiring new customers, you focus more on adequately making your product, service, or business operations better.
How Do You Calculate Customer Lifetime Value (CLV)?
To get your CLV, you use the formula;
CLV = Average Purchase Value (APV) x Average Purchase Frequency (APF) x Average Customer Lifespan (ACL).
The APV, APF, and ACL also have their own formulas for determination, where;
APV = Total Revenue / Total Number of Purchases
APF = Number of Purchases / Number of Unique Customers
ACL = 1 / Churn Rate, where the Churn Rate = (Customers at the beginning of the period – customers at the end of the period) / customers at the beginning of the period.
For instance, imagine a situation where you have 200 customers at the end of January and your business has made a revenue of $100,000 from 500 purchases. If you had 400 customers at the beginning of the month, your calculations will then play out the following way;
APV = $100,000 / 500 = $200
APF = 500 / 400 = 1.25
ACL = 1 / {(400 – 200) / 400} = 2 months
To get your CLV,
CLV = 200 x 1.25 x 2 = $500. This result means you project to make $500 from each of your customers, and this relationship is expected to last for 2 months.