What Is Customer Lifetime Value (CLV)?

Customer lifetime value (CLV) is a metric used in business and marketing to assess the total monetary value a customer provides a company over the entire relationship duration. It represents the net profit or revenue that a business expects a customer to generate during their lifetime as a paying customer. Calculating CLV typically involves estimating the average customer lifespan, the average revenue generated per transaction, and the average number of transactions over the customer's lifetime.

CLV considers not only the initial purchase or transaction but also factors in subsequent purchases, repeat business, and the potential for upselling or cross-selling. By analysing CLV, companies can gain insights into the long-term profitability of their customer base and make informed decisions regarding customer acquisition, retention, and relationship management strategies. 

You can look at customer lifetime value in two ways: historical value and predictive value. As their names suggest, historical customer lifetime value represents all the money a customer has spent with your brand to date. In contrast, predictive lifetime value estimates how much money the customer will spend in the future with your brand. 

Example of CLV

Imagine you own a local pizza restaurant and want to calculate the customer lifetime value for your average customer. Here are some hypothetical figures to work with:

1. Average order value: ₹3,000

This figure represents the average amount spent by a customer on each order.

2. Average frequency of orders: 4 times per month

On average, a customer visits or orders from your restaurant four times within a month.

3. Average lifespan as a customer: 2 years

This figure refers to the average duration a customer stays loyal to your restaurant.

To calculate the CLV, you would multiply the average order value by the average frequency of orders per month and then multiply that by the average lifespan as a customer:

CLV = Average Order Value x Average Frequency of Orders per Month x Average Lifespan as a Customer

CLV = ₹3,000 x 4 x 12 x 2 = ₹3,000 x 96 = ₹28,88,00

In this example, the estimated CLV for a customer of your pizza restaurant is ₹28,88,00. This figure means that, on average, each customer will likely generate a total revenue of ₹28,88,00 over two years.

Why is customer lifetime value important? 

Understanding the CLV can support business decisions and help the company better understand the costs associated with providing products and services to its customers. Additional reasons CLV is so essential include the following:  

• Make better decisions: Better data can help you make more informed decisions. CLV can help you decide where to spend marketing money, how to manage inventory, and other factors like production capacity. 

• Understand customer pain points: Calculating customer lifetime value gives you better data on how your customers act and think, their problems, and what they want from your products. CLV is essential to see signs of attrition and help you consider why customers keep returning (or not) to your brand.

• Improve retention: Tracking CLV will help you pay attention to changes. This metric can help you understand what works well and what to fix when something goes wrong. 

Related terms 

• Churn rate

• Target market

• Jobs to be done

• Social listening

Get started in digital marketing

Understanding customer lifetime value and how to use it to your advantage can significantly impact your marketing decisions. This essential data point can help you understand customers’ pain points and help aid retention efforts.

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