Customer Lifetime Value. What is it, and Why is it Important?
Customer lifetime value (CLV) is the net profit generated by a customer over the course of their entire relationship with your business. It’s calculated by adding up all the revenue generated from a customer over their lifetime, plus the costs associated with acquiring, engaging and retaining them.
This can be broken down into three components:
Acquisition cost: This includes advertising spend, website design costs and support staff salaries
Customer lifetime value (CLV): You’ll need to determine how much money each customer brings in during each month of their contract. For example, if you sell clothes online for $100 per item and customers buy 20 items a year for five years, then this would make up approximately 75% of your CLV
Churn rate: The percentage of customers who leave after one year or less
As marketers, CLV is important to us because it helps us understand our clients customers. We want to understand what drives customer loyalty and profits so that we can focus on the right strategies, tactics, and activities to improve both.
So, CLV is a Good Indicator of Consumer Loyalty?
Absolutely! Your CLV can be used as an indicator of your customer loyalty, which is why it’s so important for you to understand it. Knowing how much you can expect to profit from each customer over their lifetime helps you make better decisions, such as when to upgrade your product or service, or whether it’s worth going after a new market segment.
Identify your best customers. Tracking CLV allows you to identify the most valuable users of your product or service by measuring their spending over time. In addition, knowing how long these individuals remain a customer gives you an idea of how much money they’re likely to spend in the future.
Make smarter marketing decisions. Knowing what makes an individual valuable—and how much that individual is worth to your company—helps inform other decisions made by marketing teams (Like us!). For example: Would it be more beneficial for us to focus on acquiring new customers for you, or, is there more value in retaining existing ones? How can we improve our relationship with each of these specific groups? What type of messaging resonates with them? How should we invest in marketing efforts going forward?
We hope this post helped you understand customer lifetime value and its importance. If you want to know more about the topic, feel free to contact us anytime!