What is Customer Lifetime Value (CLV) and why is it important to your business strategy?

What is Customer Lifetime Value (CLV)?

Customer Lifetime Value (CLV), sometimes also referred to as customer value, is a measure that represents the total amount a customer is expected to spend at your company during the time he is a customer. In other words, it provides an estimate of the revenue a customer generates over his entire "life" as a customer.

The formula for CLV can be calculated in different ways, but a commonly used basic formula is:

CLV = (Average Spend per Purchase) x (Number of Purchases per Year) x (Average Customer Lifetime)

For example, if a customer spends an average of €50 per purchase, makes four purchases per year and is expected to remain a customer for five years, the CLV would be as follows:

CLV = €50 x 4 x 5 = €1000

Why is CLV important to your business strategy?

Understanding your customers' Customer Lifetime Value helps you make better decisions about your marketing, sales and customer service. Here are some reasons why CLV plays an important role in your business strategy:

• Understanding customer value helps with budgeting: By knowing the CLV, you can better determine how much you want to invest in acquiring new customers. Say you know that a customer brings in an average of €1000 over their customer lifetime value, you might be willing to invest more in marketing campaigns to bring that customer in.
• Increased focus on customer retention: Companies that measure their CLV often find that retaining existing customers is more profitable than constantly seeking new ones. This encourages a shift towards improving customer satisfaction, providing excellent customer service and developing loyalty programmes.
• Strategic product development: CLV can help you understand which products or services are most valuable to your customers and which products contribute to longer customer lifetime value. This enables you to develop new products that address the needs of your most valuable customers.
• Improves segmentation: By using CLV, you can segment your customers based on their expected value. This allows you to develop targeted marketing campaigns for the customers who have the highest CLV and offer them special offers or exclusive benefits.

How do you calculate CLV?

Now that you understand why Customer Lifetime Value is so important, let's see how exactly you can calculate it for your own business. Follow the steps below to get an idea of your customers' CLV:

1. Determine the average spend per purchase

The first step is to calculate how much a customer spends on average per purchase. You can do this by dividing total sales by the number of completed transactions over a given period. For example, if in one year you generated €100,000 in sales with 2000 transactions, your average spend per purchase is:

Average spend per purchase = €100,000 / 2000 = €50

2. Calculate the number of purchases per year

To determine the number of purchases per customer per year, divide the total number of transactions by the number of customers. Suppose you have 1,000 customers and performed 2,000 transactions, then the average number of purchases per year:

Number of purchases per year = 2000 / 1000 = 2

3. Estimate average customer lifetime value

Average customer lifetime value is the number of years a customer remains loyal to your business on average. This can be tricky to measure precisely, but you can make an estimate based on historical data or customer surveys. For example, if you know that a customer remains a customer for 5 years on average, use this as customer lifetime.

4. Calculate the CLV

Now that you have collected the three key metrics, you can calculate the Customer Lifetime Value:

CLV = (Average Spend per Purchase) x (Number of Purchases per Year) x (Customer Lifetime)

If we use the earlier examples:

CLV = €50 x 2 x 5 = €500

This customer was expected to generate €500 in revenue over its entire customer lifetime.

How do you increase your customers' CLV?

Increasing your Customer Lifetime Value can significantly improve your profitability. Here are some strategies to achieve this:

• Improve customer service: Customers who have a positive experience with your customer service will stay loyal longer. Make sure your customers always get excellent service and that any problems are solved quickly.
• Cross-sell and upsell: Encourage customers to buy additional products that match their previous purchases. Cross-selling and upselling can increase the average value per transaction.
• Loyalty programmes: Reward your most loyal customers with discounts or special offers. This encourages repeat purchases and makes customers stay with you longer.
• Ensure consistent communication: Keep in regular contact with your customers via email or social media. This helps keep the relationship strong and keeps customers coming back for more purchases.

Conclusion

Customer Lifetime Value (CLV) is one of the most valuable metrics you can use to optimise your business strategy. It not only helps you understand how much each customer is worth, but also gives you insights into how to retain customers and create more value.

Want to learn more about how to increase your customers' CLV or how to apply this metric in your business strategy? Feel free to contact us, we are ready to help you!