What Is Customer Lifetime Value? Everything You Need to Know

Larry VanDenHandel on March 25, 2020

According to a study conducted in the UK, only 34% of marketers were aware of what customer lifetime value (or CLV) is and what its connotations are. Furthermore, only 24% of the respondents think that their companies are keeping an eye on it successfully.

Clearly, the essence of CLV has mostly been ignored by most businesses without even knowing that this is one of the most important metrics that they must observe to grow and prosper.

CLV indicates the level of impact that you have with your market, the effectivity of your products and services, the productivity of your marketing measures, and the improvements that your brand is supposed to implement.

As hard as it is to calculate, computing your customers’ lifetime value doesn’t require much of a genius-level IQ. You can easily come up with this metric to highlight important points as your business grows.

When your customer lifetime value magnifies, that means you’re making a strong impact on your audience. This way, you can establish ways on how you can enhance your processes more for future customers.

How can you use it to improve your business?

The customer lifetime value is the amount of money that your customers will spend on your products and services over the entire duration of their customer journey.

In simple terms, it identifies the total contribution that your customer provides your company over a specific time frame. It's a primary metric in perceiving your customers’ thoughts. More accurately, it signifies the strength of the relationship that you have with your audience.

The point of view that this metric present is helpful in illustrating the future value that businesses can obtain from their marketing strategies. That’s why a close examination of investments must be performed with long-term profits in mind rather than short-term victories.

Comparatively, the customer lifetime value aids in understanding how to maximize the money that you have invested in acquiring customers rather than thinking about how you can minimize costs along with the acquisition.

It enables brands to come up with a cost-efficient method that implements a specific amount of budget while securing various types of customers, more so with audiences that bring in more revenue than others. This is the reason why it is vital for organizations to determine which type of customers they are going to center most of their efforts and resources.

Consequently, it is common knowledge that customer retention is always related to satisfaction, and doing methods to achieve the latter is oftentimes cheaper in comparison to acquiring a new customer. Despite being unsure how long a certain customer’s patronage would last, computing the customer lifetime value will help you estimate it and utilize it as a periodic value.

The type of business that you have determines the period of time that the CLV utilizes, but most, if not all, use a 12 or 24-month period.

Why is there a need to calculate the Customer Lifetime Value?

Measuring the CLV is necessary to determine customer retention. It has been proven that it is harder to sell a company’s products and services to somebody who has just encountered it for the first time in comparison to those who already had an experience with it.

Clearly, selling more to repeat customers significantly contributes to a business’s profitability, which emphasizes the importance of establishing customer loyalty. However, it is vital to note that customers aren’t equal in terms of profitability and other metrics. Learn who to prioritize without jeopardizing your other customers.

The CLV also determines the number of investments that you should make in establishing customer loyalty with your current audience. It aids in planning expenditure and allocating the proper amount of budget towards retention and acquisition.

Calculating it helps in creating the correct marketing goals along with strategies to lower acquisition costs while staying afloat for establishing customer loyalty. This aids in crafting up promos that encourage customer expenditure within the brand. Nevertheless, the benefits do not end just yet.

The CLV enables you to check out the health of your business by considering a lengthy time frame into account. Marketers can examine whether the company’s implemented strategies in terms of acquisition and retention are achieving short-term objectives or are heading towards continuous growth and development. Statistics will then help you decide if you are ready for an expansion or not.

Calculating customer lifetime value gives you a lot of information about your audience and clients. The higher the results you get, the considerable your profits become.

As an organization, you might have to spend your resources on getting new customers and retaining the old ones. However, customer lifetime value can be improved. Methods such as social media marketing, sending SMS and creating emails can be applied.

What are the benefits of customer lifetime value for your business?

Applying the CLV can enhance customer profiling and segmentation. It aids in coming up with personalized offers, approaching customers in various ways depending upon their potential value. Doing so refines forecasting methods and improves conversation rates. Moreover, information collected through analytics and other significant methods empowers your profiling and segmentation style.

The CLV can also guide the organization in establishing customer retention. It targets priorities like carefully studying the different types of customers, which one to focus on, and what methods to use upon approaching them.

This metric can also be utilized as a tool to enhance operational systems and customer satisfaction. As it aids in learning more about your audience, the CLV can help you come up with effective promotional measures that you can use to entice customer loyalty. It strengthens the relationship between the brand and the customer.

The CLV also helps you forecasting the need for our products and services. This will enable you to carefully manage and allocate your investments and resources on different aspects of the business. It enhances productivity and efficiency within the company.

As the CLV is composed of information about your customers including their history of purchases and transactions, then it would be easier for your company to identify your profitable customers. Utilizing this data will allow you to identify who to promote more of your products and how you can slowly turn these patrons into brand ambassadors.

What is the formula for calculating Customer Lifetime Value?

The simplest customer lifetime value formula is the total value of transactions multiplied by the organization’s average gross margin.

CLV = Total Value of Transactions x Average Gross Margin

That being said, if a certain individual browses on your site 20 times and creates a transaction of $20 per visit, and your average gross margin is $10 after considering the amount of money that you spent for acquiring that customer, you will multiply $400 (the total money that the customer spent), by $10 (which is your average gross margin), obtaining $4,000 in the end.

Going for a predictive approach will make the process a little harder. Computing the average customer lifetime value formula needs average monthly transactions, the average amount of money spent per transaction, the average number of months when this customer remained loyal, and the average gross margin. Multiplying all of these will give us a result of a predictive customer lifetime value.

Note that the type of calculation that you will use in getting this metric depends on the type of business that you possess.

How do you improve Customer Lifetime Value?

Segment your customers based on their interests and locations on the sales panel.

Ensure that your promotional efforts are sent to their designated recipients.

For instance, those who are into your company for books would not be interested to read the content that you have for your customers who buy art materials. At the same time, a person who just knew about your brand for the first time (via a social media post perhaps), probably isn’t ready to buy anything yet. This is prior to being so familiar with whatever it is that you have to offer for your audience.

In plain sight, when it comes to sending emails and other promotional materials, the approach shouldn’t be one size fits all. Send them these things according to their interests and their biggest purchases. You also need to come up with something for repeat customers. You’ll want to keep in touch with those people and bring them back to your site for future purchases.

Produce products that go with your existing offerings.

Everything that you will be able to sell at a specific time frame will depend on certain factors like the probability of your products being bought by people amidst other necessities, budgets, alternatives, and seasonality.

You can also sell products that can go along with your current business. If you are offering veterinary services, then you can sell medicines and dietary supplements for pets. This encourages people to purchase more and gives you a chance to serve your customers better.

Be consistent in sending out perks and other special offers to customers who deserve it.

Observe the perfect time to do it and be sure to offer it to the right people, such as those who purchase a lot of items in one transaction. Whenever this happens, you can offer 10% down to the customer.

Send out emails of gratitude to establish contact with your customers.

Let them know that you appreciate their repeated visits and purchases.

Go the extra mile — and while you’re at it, take it as an opportunity to introduce new marketing campaigns and promotional agendas.

Wrap Up

Customer lifetime value is a great and critical metric that businesses need to utilize in order for the business to flourish.

Along with technological advancements of analytics and other customer data platform, the CLV provides the information that is necessary to enhance customer experiences. It can also help in improving the product and creating powerful marketing campaigns and activities.

Larry VanDenHandel

Larry VanDenHandel

Larry is the Co-Founder & CTO of Lootly.