Customer lifetime value
What is customer lifetime value and how can you calculate it?
What is customer lifetime value?
Customer lifetime value is an estimate of the total value a customer brings to your business. This concerns the entire period that this customer does business with you. It’s not a static number, but a dynamic value that can change based on customer behavior, market trends, and business strategies. In short, it’s the average revenue of a customer, not just from one purchase, but from the entire relationship that the customer has with your company. The longer this relationship remains good, the more often the customer buys products from you or purchases services from you and the higher the customer lifetime value becomes. For example, one way to increase CLV is to set up a loyalty program.
The benefits of customer lifetime value
Now that the question ‘what is customer lifetime value’ has been answered, it’s good to know why it’s relevant. There are many reasons why companies should focus on understanding and improving customer lifetime value. It has everything to do with the benefits that CLV offers:
- Improved customer segmentation: customer lifetime value helps identify the most valuable customers. This can then serve as input for more effective marketing and sales strategies.
- More effective customer retention: by knowing the CLV, businesses can better identify higher-value customers and develop strategies to retain these specific customers.
- Optimized budget: businesses can better allocate their marketing and sales budgets by calculating customer lifetime value.
- Better product development: it can help develop products and services that meet needs and expectations.
- Increased profitability: by maximizing CLV, companies can improve their profitability in the long run.
So reason enough to invest in CLV. And have you properly integrated all your organization’s business data? Then it is also quite easy to calculate the customer lifetime value.
Calculating customer lifetime value
Now that it is clear what customer lifetime value is, it is good to look at ways to calculate customer lifetime value. There are several methods to calculate CLV, but the simplest is to use average purchase value, average purchase frequency and average customer lifetime value. The formula looks like this:
CLV = (Average Purchase Value x Average Purchase Frequency) x Average customer lifetime
Formula for CLV calculation explained
- Average purchase value: this is the average amount customers spend when they make a purchase. You can calculate this by dividing the total revenue of a given period by the number of purchases in that period.
- Average purchase frequency: this is how often customers make a purchase on average in a given time period. You can calculate this by dividing the total number of purchases by the total number of unique customers.
- Average customer lifetime: this is the average amount of time customers stay to buy from your business. It is usually expressed in years. The calculation of this can be more complex because it takes into account customer churn and retention.
Helping to improve customer lifetime value
Customer lifetime value is thus a powerful indicator for understanding the value customers bring to your business. By calculating CLV, you can make better business decisions, from customer retention and product development to budget allocation. Still, as a business you may struggle to make the optimal decisions. Then, fortunately, there are still professionals, who know all about CLV, that you can call on. Because the question ‘what is customer lifetime value’ is worth nothing if you then do nothing with it. So get help in time if you can’t do it yourself.
Remember that improving customer lifetime value is an ongoing process. A process that requires regular analysis and adjustment of your business strategies. So start calculating your customer lifetime value today. Soon enough, you’ll discover how to maximize your customer lifetime value. Good luck!
