What is Customer Lifetime Value
The lifetime value of a customer, or customer lifetime value (CLV), represents the total amount of money a customer is expected to spend in your business, or on your products, during their lifetime. This is an important figure to know because it helps you make decisions about how much money to invest in acquiring new customers and retaining existing ones.
By applying Customer Lifetime Value marketing managers can easily arrive at the rupee value associated with the long-term relationship with any customer. It is difficult to predict how long each relationship will last, but marketing managers can make a good estimate and state CLTV as a periodic value.
Why is Customer Lifetime Value (CLV) important?
1. Generate real ROI on customer acquisition
CLV helps you focus on the channels that give you the best, most profitable customers. You should be optimizing your marketing channels in terms of the lifetime value a customer contributes to your brand, rather than the gross profit on the initial purchase.
You are therefore trying to maximise your customer lifetime value in relation to your cost of customer acquisition (CLV: CAC).
Focusing on CLV will change the economics of your customer acquisition strategy. Suddenly you can pay a lot more to acquire a customer because you are not held back by the profit generated from a single purchase but from the purchases made over a lifetime with your brand.
Information about your customers with the highest CLV (known as your VIP customers) will also give you insight into exactly who you should be targeting in terms of demographics.
Factoring CLV into your strategy is a recipe for success, and will leave all your less data-driven competitors in the dust while you’re busy ruling and dancing in your e-commerce disco (which you threw because you rule).
2. Enhance your retention marketing strategy
The value of a marketing campaign (for example, one aimed at turning your one-time purchasers into repeat customers) should not just be valued on the instant revenue they drive. It should be valued in terms of what impact it had on the average CLV of the segment of customers you are targeting.
How did it alter the trajectory of CLV over time for an average customer? To calculate this, you'll need accurate predictive analytics so that you can see how predicted CLV is influenced by different marketing actions.
3. Create more effective messaging, targeting & nurturing
Segment your customer base by CLV so that you can improve the relevance of your marketing with more personalized messaging.
A useful variable to use here would be the types of products you market to your customers from different segments.
4. Improve your behavioral triggers
By organizing data into natural groupings (or clusters) you can discover the behavioral triggers that incentivised your best customers to make their first purchase.
Once you’ve taken a look at your beautiful results, you should be trying to replicate this behaviour with your prospective customers in order to turn them into first-time purchasers.
5. Improve output from customer support
Focus your time on giving special attention to your most valuable customers. Never forget Pareto’s handy little principle: 20% of your customers generate 80% of your revenue.
Using CLV to identify your most valuable customers will help you decide where to direct your customer service resources. Paying attention to your most valuable (and profitable) customers will help you push up margins, at the same time as fostering strong relationships through better service with your most important segment.
How to Calculate Customer Lifetime Value
Now that we know CLV is integral to your business’ ability to grow, let’s talk about how you can calculate it. Measuring CLV requires looking at the length of the customer lifespan, retention rate, customer churn rate, and the average profit margins per customer.
However, there are several different ways to calculate CLV, including the simple and traditional formulas that we’ll look at today. CLV can also be historic or predictive depending on the data used.
Historic CLV is the sum of all profits from a customer’s past purchases. This number is based on existing customer data from a specific period of time.
Predictive CLV allows you to project how much revenue a customer will generate for your business over the course of the customer relationship. This is considered a more complete method of assessing CLV.
The predictive model uses transaction history and behavioral patterns to determine the current value of a customer and to forecast how customer value will evolve with time. As you collect more data to include in this calculation, the value will become increasingly accurate.