What is Customer Lifetime Value and what do you actually need to know?

Customer Lifetime Value is the crystal ball that indicates how healthy your long-term financial forecast is looking. We explain its benefits and how to calculate it.

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Every business wants to know the secret formula to sustainable financial growth. In reality, it’s not complex. The magic ingredient is nurturing and retaining your client relations so that you can boost their customer lifetime value (CLV).

This metric looks at the total revenue your brand can expect to make from a single customer to identify hiccups in your sales funnel, blockers, or customer churn. CLV may initially seem daunting, but the pay-off can be huge. This guide will walk you through everything you need to know.

What is CLV?

Customer Lifetime Value (CLV) measures the total revenue a business can reasonably expect from a single customer account throughout their entire relationship with the company. The longer a customer continues to make purchases and engage with your business, the greater their lifetime value becomes.

It’s a highly valuable metric to calculate as it can guide strategic decision-making, helping businesses allocate resources more effectively, prioritise different customer segments, and tailor marketing campaigns to boost customer loyalty.

There are two ways to model CLV: historical and predictive.

  • Historical: this looks exclusively at past data and makes a judgement on the value of customers based on previous transactions. You’ll be able to glean valuable insights into spending patterns, preferences, and loyalty.
  • Predictive: this approach uses machine learning to project the revenue a customer is likely to generate over their entire lifetime with the company. You can factor in variables like customer behaviour, market trends, and external factors to model this accurately.

Why does CLV matter?

CLV can provide the foundations of a roadmap towards customer loyalty and scalability. Here are four key reasons why it should be part of your business data:

  1. Boosting customer loyalty and reducing churn: by understanding the long-term value of each customer, businesses can tailor their engagement strategies to foster lasting relationships. Insights from CLV data enable companies to identify and address factors that contribute to customer churn.
  2. Improving strategic decision-making: the data helps identify specific customer segments that contribute the most revenue. This knowledge is invaluable for segmenting your audience based on the value they bring, allowing you to tailor marketing campaigns, encourage repeat purchases, and identify cross-selling and upselling opportunities for different customer segments.
  3. Shifting focus to long-term relationships: CLV encourages a shift in focus from short-term gains to long-term customer relationships. By concentrating efforts on retaining existing customers, businesses can reduce acquisition costs and cultivate a base of repeat customers. This shift will improve the value of each customer to the business over time, but it will also simplify financial planning by offering insights into future revenue streams and changes in customer behaviour.
  4. Gaining a competitive advantage: CLV helps businesses stay ahead of the competition by providing a deep understanding of customers. By identifying trends in customer data, businesses can proactively address changes and optimise strategies. For example, insights from CLV might be used to fine-tune customer support strategies or enhance loyalty programs to meet the evolving needs of customers.

Pros and cons of CLV

Pros and cons of CLV

✔️ Improved customer retention: CLV empowers businesses to focus on customer retention by understanding the long-term value of each customer. By tailoring strategies to enhance customer loyalty, businesses can reduce churn and cultivate lasting relationships, contributing to sustained success.

✔️ Drive repeat sales: by identifying customer segments with high CLV, companies can design targeted marketing campaigns and promotions that resonate with these customers, fostering a cycle of repeated purchases.

✔️ Encouraging higher-value sales: through personalised approaches, companies can identify opportunities for upselling and cross-selling, maximising the revenue potential of each customer.

✔️ Increased Profitability: As a comprehensive metric, CLV contributes to increased profitability. By optimising marketing spend, improving customer satisfaction, and focusing on high-value customer segments, businesses can ensure an efficient allocation of resources, ultimately boosting the bottom line.

Difficulty in measurement: one of the primary challenges associated with CLV is the difficulty in measurement. Calculating the lifetime value of a customer requires accurate data on various factors, including purchase history, customer behaviour, and retention rates. For businesses without robust data systems, measuring CLV can be a complex task.

❌ Misleading high-level results: while CLV provides a holistic view of customer value, high-level results can sometimes be misleading. A high overall CLV may mask issues within specific customer segments, locations, or demographics. It's crucial for businesses to drill down into the data to ensure a comprehensive understanding of their customer base.

Measuring CLV

The overall formula to measure CLV is:

Customer Lifetime Value = Customer Value x Average Customer Lifespan

Here’s how to calculate each element:

Customer value

  1. Figure out the average purchase value of your products
  2. Calculate the average number of purchases per customer (also called purchase frequency rate)
  3. Multiply these two figures together to get the customer value. This makes it easy to find the customers who have the most impact on your revenue. We recommend implementing a CRM to confirm data accuracy.

Average customer lifespan

  1. Figure out the average number of years a customer stays active with your company.
  2. Divide this number by your total customer base to get the average. Ensure you’ve cleaned your data well to avoid having duplicate accounts in your data.

This gives you insight into how much longer you can expect customers to stick around, letting you implement preventive strategies to build customer relationships and reduce churn.

Tips to improve CLV

1. Optimise your onboarding process: make it easy for customers to navigate your website, find relevant information, and connect with your brand. Utilise customer data to personalise the onboarding experience, tailoring it to individual preferences and behaviours. A smooth onboarding process builds trust, establishes authority, and sets the foundation for long-term customer loyalty.

2. Collect customer feedback: feedback allows you to sense check your CLV calculation. Actively seek feedback on the onboarding experience through surveys, direct communication, or feedback forms. This will help you understand customer perspectives and identify areas for improvement.

3. Increase average order value: Boosting your average order value is a strategic move to increase CLV. When customers are about to check out, seize the opportunity to offer relevant complementary products. Consider creating bundled pricing packages that combine these complementary items at a discounted rate. Additionally, leverage customer data to offer personalised discounts or incentives to specific customer segments. Keeping a close eye on customer retention rates and repeat purchases will provide valuable insights to fine-tune strategies for maximising CLV.

4. Nurture your relationships: Building lasting relationships with customers is at the heart of CLV. Invest in personalised outreach initiatives that go beyond generic communication, for example in CRM systems that channel AI to leverage personalised marketing emails or post-purchase follow up messages. Respond promptly to customer comments and messages, which demonstrates a commitment to customer satisfaction. Share authentic and relatable content that resonates with your audience. Standing out from the crowd requires genuine engagement, and nurturing relationships fosters customer loyalty over time.

Conclusion

One engaged and loyal customer will always be better than two fresh ones who won’t give your business a second thought. Return clients will bolster your CLV and give you more security as you know certain portions of your customer base will keep making purchases. Strengthening your customer base is all about working smarter, not harder.

Frequently Asked Questions
  • What is an example of a customer lifetime value?
    You spend £500 to acquire a new customer, and over the course of your relationship, the customer generates £1,000 in revenue. In this case, your net CLV would be £500. However, this is just a simplified approach, and other factors like the length of your relationship and the aggregated value of their purchases will change your CLV.
  • What are the two types of CLV?
    There is a historical and predictive CLV. Historical CLV looks at past data to make a judgement on the value your customers have brought to your business. Predictive CLV uses machine learning to project the revenue a customer will likely generate over their relationship with your brand.
  • Why do we calculate customer lifetime value?
    It’s important to calculate CLV because it provides businesses with a long-term picture of the financial health of their businesses and helps identify blindspots where customer retention is weak in the sales funnel.
Written by:
Fernanda is a Mexican-born Startups Writer. Specialising in the Marketing & Finding Customers pillar, she’s always on the lookout for how startups can leverage tools, software, and insights to help solidify their brand, retain clients, and find new areas for growth. Having grown up in Mexico City and Abu Dhabi, Fernanda is passionate about how businesses can adapt to new challenges in different economic environments to grow and find creative ways to engage with new and existing customers. With a background in journalism, politics, and international relations, Fernanda has written for a multitude of online magazines about topics ranging from Latin American politics to how businesses can retain staff during a recession. She is currently strengthening her journalistic muscle by studying for a part-time multimedia journalism degree from the National Council of Training for Journalists (NCTJ).

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