Customer Lifetime Value (CLV)

Overview

Customer Lifetime Value (CLV) is a prediction of the net profit associated with the entire future relationship with a customer. The concept is an important one in that it encourages businesses to shift their focus from quarterly profits to the long-term health of their customer relationships.

Importance

The value of knowing the CLV lies in understanding the potential revenue a customer can bring over the life of their relationship with the company. This value allows businesses to make informed decisions on customer acquisition and retention costs, as well as identifying key customer segments.

Calculation

The calculation of CLV can vary depending on the business model and customer behaviour, but a basic formula is: (Average Purchase Value x Purchase Frequency) x Average Customer Lifespan.

Average Purchase Value

This is the average amount that customers spend per purchase. It can be calculated by dividing the company's total revenue in a given period by the number of purchases in that period.

Purchase Frequency

This represents how often customers make a purchase in a given period. It can be calculated by dividing the total number of purchases by the number of unique customers.

Average Customer Lifespan

This indicates the average length of time that customers stay with the company before churning. This can be calculated by adding up all customer lifespans and dividing by the number of customers.

Usage in Digital Marketing

CLV plays a critical role in digital marketing. It is commonly used to:

Assess Profitability

Understanding the CLV helps companies determine how much profit they can expect from a customer, which in turn informs the amount they can spend on acquisition.

Segment Customers

CLV is used to identify high-value customers, which can inform a company's segmentation and targeted marketing strategies.

Optimize Marketing Budget

By knowing the CLV, a company can determine how much to invest in retaining existing customers versus acquiring new ones.