What is Customer Lifetime Value (CLV)?
Customer lifetime value (CLV) measures the total revenue a business can expect to earn from a customer throughout their entire relationship with the company. It takes into account not only the initial purchase a customer makes but also their expected repeat purchases over time.
By understanding each customer’s value, businesses can focus their efforts on retaining high-value customers and driving repeat business, ultimately leading to increased revenue and profitability.
How to Calculate CLV: Customer Lifetime Value Formula
Several approaches exist for calculating CLV, with the most common formula being:
CLV = Average Customer Value (ACV) x Average Customer Lifespan (ACL)
Key Components:
Average Customer Value (ACV): is calculated by multiplying the average purchase value by the average purchase frequency rate.
Average Customer Lifespan (ACL): is calculated by averaging the time between the first time a customer purchased a product and the most recent time they bought a product.
Why is Customer Lifetime Value Important?
Understanding CLV offers a multitude of benefits for businesses:
- Improved profitability: tracking CLV allows you to find specific customers who bring the most value during the life cycle. Finding your ideal customers informs where to invest resources and where to focus on encouraging repeat purchases.
- Improve customer retention: CLV calculations can enable businesses to identify customers at risk of churn and implement targeted retention strategies. Intervening early with targeted retention strategies could improve retention and profitability.
- Boost customer loyalty: by understanding customer behaviours, preferences and spending patterns, marketing efforts can be used to target customers throughout the life cycle to build loyalty.
- Product insight: a high customer lifetime value indicates customers love your brand and products. A low customer lifetime value indicates customers are not satisfied with your offering, and this insight can feed into product development.
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