Customer Lifetime Value (CLV)

What is Customer Lifetime Value (CLV)?

Finance

Customer Lifetime Value (CLV) represents the total funds a consumer spends at a business for products and services without any specific time measurements restricting the data.

CLV is a crucial metric for businesses to track because it enables better decisions about marketing investments. A company has more data that lets them see where to acquire new customers or retain their existing relationships.

When customers are happy with their purchases, they’re more likely to spend money at the same business another time. If a customer prefers Nike shoes over other brands, the CLV could be higher than $1,000 should the individual purchase at least one pair of shoes every few years over the course of their lifetime. 

That’s why some companies separate CLV into a “big picture” and a “small picture” category. By estimating how much a customer would spend, businesses can understand how much to contribute to consumer acquisition or retention strategies.

Takeaways of Customer Lifetime Value (CLV)

  • The odds of selling goods or services to existing customers can be as high as 70%, whereas a new customer might convert as low as 5% of the time. CLV identifies the places where company resources can grow revenues quickly.
  • CLV identifies the product types that consumers want the most to ensure a business spends marketing money in the areas that offer the greatest chance for the biggest return.
  • This metric can apply to every aspect of a customer transaction, ranging from each purchase's total value to the individual CLV for employees, store locations, website pages, or content descriptions.

Understanding Customer Lifetime Value (CLV)

Businesses can calculate customer lifetime value with a straight forward formula. CLV equals the average value of a transaction (V) multiplied by the times a purchase takes place annually (X), which is multiplied again by the length of the relationship expressed in years (Y).

The simplified formula is expressed as: (V * X)*Y = CLV

If a consumer spends $100 on a pair of shoes only once, their lifetime value to Nike is the same amount as the purchase price. Should that consumer buy two pairs per year for three years, their CLV would be $600 ($100*2*3).

Nike will want to pay more attention to the customer who initiates two transactions per year over the person who buys only once. Although both customers provide value, CLV directs a company to pay more attention to the consumers that provide the highest contributions in designated categories.

Once a business determines these figures, it can start working on boosting CLV in specific areas. These efforts might include creating a rewards program, offering freebies for long-term customers, or using targeted upsells to increase the average transaction value per person.

When CLV is a targeted metric, it becomes easier for companies to build a successful and profitable relationship network. It focuses on attracting, then retaining long-term consumers who will eventually become brand advocates.

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