What is customer lifetime value?
Customer lifetime value (CLV, also known as CLTV), represents the total estimated amount a customer is expected to spend on your products or services over the course of their lifetime.
To estimate CLV, you must first assign a specific value to each of your customers. You do this by calculating the average value of each customer purchase and the purchase frequency rate. Multiplying those two numbers gives you the customer value.
Customer lifetime value is then calculated by multiplying the customer value by the average customer lifespan.
Example of calculating a customer lifetime value:
Say your company earned $50,000 in revenue last week on 10 customer purchases. Using that example, your average purchase value is $5,000. If five unique customers made those 10 purchases, your average purchase frequency rate is twice a week. Multiplying those two numbers, your average customer value is $10,000 per week, or $520,000 per year.
If the average customer uses your product for three years, your customer lifetime value is estimated to be $1,560,000.
Why is customer lifetime value important?
Besides helping you forecast future revenues for operational planning purposes, analyzing CLV helps you target your most valuable customers with sales and marketing efforts and determine whether your customer acquisition costs (CAC) are in line with what you expect to earn from each new customer.
“CLV can also help you identify your most valuable customers so that you can prioritize them with customer loyalty initiatives”
Since it costs more to gain a new customer than it does to retain a current one, CLV can also help you identify your most valuable customers so that you can prioritize them with customer loyalty initiatives.
What is customer lifetime value in marketing?
With CLV data, companies can predict which types of customers will be the most valuable to them over time, then target those customers with marketing campaigns.
CLV also informs the overall marketing strategy and budget. Marketing can also be used to turn a low-CLV customer into a high-CLV customer by encouraging them to spend more on products or upgrade their existing services.
What is a good customer lifetime value?
Research shows that CLV should be at least three times greater than your customer acquisition costs (CAC).
A high CLV typically means customers remain loyal subscribers or buy from you frequently over a long period of time. While there’s no one definitive answer, the higher your CLV, the healthier your business is likely to be.