What is customer lifetime value (CLV)?
Customer lifetime value (CLV) is a marketing metric used to predict the total net profit that can be attributed to a single customer across the lifespan of their relationship. It’s also called lifetime customer value (LCV) or lifetime value (LTV).
Benefits of CLV
CLV gives businesses a way to assess the upper level of the value of existing and potential customers. This allows them to accurately determine how much should be spent to acquire and retain customers. By measuring CLV in relation to cost of customer acquisition (CAC), companies can determine how long it will take to earn back the money spent to earn a new customer, including sales and marketing costs.
Businesses will still want to pursue strategies for acquiring new customers at a low CAC. However, factoring in CLV makes you think about ways you might want to optimize these acquisitions by looking at maximum value rather than minimum cost. For example, if there is a specific demographic that tends to spend more in your business, it would make sense to shift resources towards it.
CLV can also be used to determine where to apply resources for current customer retention efforts. Customers with a high CLV should receive a proportionate share of attention and spending. This can be used to determine how much to invest in customer loyalty campaigns and lost customer reacquisition.
How to calculate CLV
To calculate CLV, you need to determine how much your customers spend per visit, how frequently they visit and what the customer lifespan or churn rate is. One of the simplest ways to calculate CLV is to divide average spend/month/customer by the percentage of customers that do not return.
For example, if the average customer spends $50 per month, and 20% do not return each month, then CLV is $250.
Average spend per month = $50
Churn rate = 20%
CLV = $50/20%, or $250
The above is just one example. There are several other methods that involve variables like retention costs and margins. We recommend starting with the simple example we’ve provided and adding more complexity if needed. To make things even easier for you, we’ve created a CLV calculator.
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