Customer Lifetime Value (CLV), also known as Customer Lifetime Revenue (CLR) or Lifetime Customer Value (LCV), is a metric for the total expected revenue a business can earn from a customer throughout their entire relationship with the company. CLV is a valuable metric for assessing the long-term profitability and value of individual customers to a business.
The formula for CLV is:
Average Purchase Value x Average Purchase Frequency x Average Customer Lifespan
Suppose a business sells gaming apps and it wants to calculate the CLV of a typical customer. The business’ data for the past few years that shows the following:
Average Purchase Value (APV) | Purchase Frequency | Customer Lifespan (CL) | Gross Margin |
|---|---|---|---|
$50 | 6 times per year | 2 years | 40% |
To calculate the CLV for this gaming app business, use the following formula:
CLV = APV x PF x CL x GM
CLV = $50 x 6 x 2 x 0.40 = $240
So, the CLV of a typical customer in this example is $240. This means that, on average, this business can expect a customer to bring in $240 in profit over their entire relationship with this business.
CLV is a powerful metric for several reasons:
Important CLV metrics include:
Historical CLV: This is the traditional CLV calculation, which estimates the total value a customer has generated for your business up to a specific point in time. It’s calculated by summing up the historical revenue generated by the customer.
Predictive CLV: This metric forecasts the future value of a customer based on their past behavior and trends. Predictive CLV uses tools like statistical models, ML, or AI to make these forecasts.
Average Purchase Value (APV): APV represents the average amount a customer spends in a single transaction or order.
Purchase Frequency (PF): This metric measures how often a customer makes a purchase expressed over a specific time period.
Customer Lifespan (CL): The average duration a customer continues to engage with a business, often measured in terms of years.
Churn Rate: The percentage of customers who stop doing business with a company within a specific time frame. A lower churn rate generally leads to higher CLV.
Gross Margin (GM): This represents the profit margin on each sale. It’s often expressed as a percentage of the total revenue.
Discount Rate: The rate at which a company discounts future cash flows. It’s used in the net present value (NPV) calculation of CLV to account for the time value of money.
Customer Segmentation: CLV can be calculated for different customer segments or cohorts to identify the types of customers are the most valuable. Examples include first-time customers, loyal customers, or customers in different geographic regions.
Customer Acquisition Cost (CAC): This metric calculates how much it costs to acquire a new customer. Understanding CAC in relation to CLV helps assess the efficiency of a business’ customer acquisition strategies.
Net CLV: This takes into account both the revenue generated by the customer and the cost of acquiring and retaining them, providing a more accurate picture of the customer’s profitability.
CLV-to-CAC Ratio: This ratio compares the CLV to the CAC. A ratio greater than 1 indicates that a customer is profitable, while a ratio less than 1 suggests that customer acquisition is not cost-effective.
Cohort Analysis: This involves grouping customers based on when they first made a purchase and tracking the CLV of each cohort over time to identify trends and changes in customer behavior.
Increased CLV has direct tie-ins to providing excellent customer service, understanding the needs of customers, and setting up forums in which customer feedback can be gathered and implemented. Some tactics include:
Provide Excellent Customer Service: Outstanding customer service and support can be two ways to build strong, long-lasting relationships with customers. Happy customers are more likely to make repeat purchases and refer others to a business.
Personalization: Personalized messages and marketing programs along with tailoring offers to customers’ preferences or past buying behavior are ways to boost CLV.
Loyalty Programs: Implement loyalty programs that reward customers for repeat purchases. This can include discounts, exclusive access, or points-based systems.
Upselling and Cross-Selling: Upselling and cross-selling are tactics that involve suggesting additional items or services when a customer is making a purchase. Ideally, the additional items would enhance their purchase.
Subscription Models: If applicable to, a business should consider offering subscription-based services or products. Subscriptions can provide a predictable revenue stream and encourage ongoing customer relationships.
Retention Marketing: This tactic involves focusing on retaining existing customers through email marketing, retargeting ads, and other retention strategies to keep a company top-of-mind.
Customer Feedback: Collect and act upon customer feedback to address issues and make improvements. This shows customers that a business values their opinions and is committed to their satisfaction.
Reduce Churn: A business should implement strategies to reduce customer churn, such as identifying at-risk customers and offering targeted incentives to keep them engaged.
Referral Programs: Encouraging satisfied customers to refer others to a business in exchange for rewards or discounts is a good way to boost CLV and gain additional customers.
Data Analysis: Continuously analyze customer data to identify trends, segment customers, and develop targeted marketing strategies and offers.
