Customer Lifetime Value

Customer lifetime value (CLV) is a key concept in marketing and business strategy that refers to the total amount of money a customer is expected to spend on a company’s products or services over the course of their relationship with the company. CLV is an important metric for businesses because it helps them understand the value of their customers and make decisions about how to allocate resources, such as marketing and sales efforts, to acquire and retain customers.

How is CLV calculated?

There are a few different ways to calculate CLV, but the most common method involves using the following formula:

CLV = (Average Order Value x Purchase Frequency) x Customer Lifetime

• Average Order Value (AOV) is the average amount of money a customer spends on a single order.
• Purchase Frequency is the number of times a customer makes a purchase in a given time period (e.g. annually).
• Customer Lifetime is the length of time a customer is expected to continue making purchases from a company.

For example, if a customer has an average order value of £50 and makes a purchase once every three months, and the customer lifetime is two years, the CLV would be calculated as follows:

CLV = (£50 x 4 purchases/year) x 2 years = £400

Importance of CLV

CLV is an important metric for businesses because it helps them understand the long-term value of their customers and make decisions about how to allocate resources to acquire and retain them. For example, if a company knows that a particular customer has a high CLV, it may be willing to invest more in acquiring that customer and providing excellent customer service to keep them loyal. On the other hand, if a customer has a low CLV, the company may decide to allocate fewer resources to them and focus on acquiring higher-value customers.

CLV is also important for businesses because it can help them identify opportunities to upsell or cross-sell to their customers. For example, if a customer has a high CLV, it may be worth offering them additional products or services that are related to their previous purchases. This can help the company increase its revenue and profitability.

Maximising CLV

There are a few key strategies that businesses can use to maximise their CLV:

• Offer excellent customer service: Providing excellent customer service is important because it can help increase customer loyalty and encourage repeat purchases.
• Personalise the customer experience: Personalising the customer experience can help increase customer loyalty and encourage repeat purchases. For example, businesses can use data analytics to understand their customers’ preferences and tailor their marketing efforts accordingly.
• Offer loyalty programs: Loyalty programs can help increase customer loyalty by rewarding customers for their repeat purchases.
• Upsell and cross-sell: As mentioned above, upselling and cross-selling can help increase a company’s revenue and profitability by encouraging customers to purchase additional products or services.

CLV and PPC

In the context of pay-per-click (PPC) advertising, CLV can be a useful metric for determining the appropriate bid amount for a given keyword or ad. For example, if a company knows that a particular keyword has a high CLV, it may be willing to bid more for that keyword in order to attract high-value customers. On the other hand, if a keyword has a low CLV, the company may decide to bid less in order to avoid wasting ad spend on low-value customers.

Frequently Asked Questions

How do I calculate CLV for my business?

To calculate CLV for your business, you will need to know your average order value (AOV), purchase frequency, and customer lifetime. You can then use the CLV formula to calculate the CLV for each of your customers.

Can CLV be used to predict future customer behaviour?

CLV is a useful tool for predicting future customer behaviour, as it takes into account both the amount of money a customer is expected to spend over the course of their relationship with a company and the length of that relationship. By understanding a customer’s CLV, a business can make informed decisions about how to allocate resources and tailor its marketing efforts to acquire and retain high-value customers.

What is the difference between CLV and customer acquisition cost (CAC)?

CLV and customer acquisition cost (CAC) are two important metrics for businesses to consider when making decisions about customer acquisition and retention. CLV refers to the total amount of money a customer is expected to spend on a company’s products or services over the course of their relationship with the company. CAC, on the other hand, refers to the cost of acquiring a new customer. CAC is typically calculated by dividing the total marketing and sales costs for a given time period by the number of new customers acquired during that time period.

Is CLV the same as customer lifetime duration?

CLV and customer lifetime duration are related, but they are not the same thing. CLV refers to the total amount of money a customer is expected to spend on a company’s products or services over the course of their relationship with the company. Customer lifetime duration, on the other hand, refers to the length of time a customer is expected to continue making purchases from a company. Both CLV and customer lifetime duration are important for businesses to consider when making decisions about customer acquisition and retention.