Customer Lifetime Value (CLV)

Customer lifetime value, also known as CLV, is a way for companies to measure the net profit they make from each customer. It’s essentially a metric or system that projects an estimate of how much a customer is worth to the business, on average. It’s useful for working out budgets for business growth, acquiring new customers, and retaining repeat customers.

So how do you calculate a rough CLV? It’s simple. You take the figure for how much it costs to acquire a customer and serve them. You then take this total away from the amount of revenue you make from the customer.

What else is taken into account? How much time they spend with you, and their total number of visits. You can then segment this further to work out the average value of each of your customers per week, year, etc.

That said, if you only look at how much your customers have spent in the past, you haven’t taken into account that in the digital age, customers behave differently. It also stands to reason that new consumers may behave differently from old ones. This is why it’s important to not just determine your CLV by dividing your total revenue by your total number of customers because this sum fails to take into account a customer’s relationship with your company.

In light of that, the following are a few other ways to determine your company’s CLV.

Individualized Customer Lifetime Value

Some companies look at and analyze each individual customer. This means tracking where their customer come from and which campaigns they responded to. For instance, was it through a social media marketing push, a direct mail directive, or a money-off coupon?

It also takes into consideration the number of times a customer clicks through your emails to visit your website, social media handles, or other landing pages.

They can then use this information to not only predict customer spending but also target sales and marketing campaigns to specific consumer segments according to their distinct preferences.

Analysis of Your Cohort

This is essentially breaking down your overall group of customers into smaller groups (cohorts) defined by the shared things they have in common. By looking at your customers as cohorts rather than individual shoppers, your company gets a simpler view of the differences between them.

Most businesses pay careful attention to the following distinctions in their customer cohort:

• What they buy
• When they buy
• How much they spend

Just as a few examples.

The Average Revenue Per Customer

Here’s another equation for you: Select the customer you want to analyze and calculate the average revenue they’ve generated for you. Then add the number of months since their first purchase and multiply that by either 12 or 24. This provides you with a one or a two-year customer lifetime value.

But, it doesn’t take your customer’s behavior into account or any unforeseen developments. For example, your company’s strategy may change, or your customers’ financial situation or preferences may have altered. All in all, customer lifetime value is something you’ll have to monitor and re-assess continually.