Customer lifetime value (CLV) is a commercial indicator that assesses the average customer’s potential earnings over the term of the relationship. Calculations of client lifetime value can be complicated by variations in items, prices, purchase frequency, and volume. But with the correct tools, you can quickly determine client lifetime value.

Understanding CLV has a variety of advantages, including helping you make more intelligent marketing and sales choices. This manual offers explanations of customer lifetime value, instructions for calculating it, and other pertinent data that managers and business owners should be aware of.

Customer Lifetime Value (CLV): What Is It?

Customer lifetime value (CLV) is a metric used to describe how much money a company can expect to make overall from a typical customer during the duration that person or account stays a customer.

It’s better to consider both the total average profit and the total average revenue that a customer generates when calculating CLV. Each offers crucial information about how clients engage with your company and whether your overall marketing strategy is performing as planned.

You could choose to partition your company’s customer base into quartiles or another grouping for a more thorough analysis of CLV. As a result, you may attempt to reproduce that performance throughout your whole client base. This can provide better insight into what is working well with high-value customers.

Why Businesses Value Customer Lifetime Value

We calculated the average lifetime value of a customer for a grocery store in the aforementioned case. But why does CLV matter to businesses? Here are a few main justifications for monitoring and utilising CLV:

You Can’t Improve What You Don’t Measure: 

Once you start calculating client lifetime value and breaking it down into its component parts, you can implement particular pricing, sales, advertising, and customer retention tactics with the aim of consistently lowering costs and raising profit.

Improve Your Customer Acquisition Cost Decisions:

Knowing what you can expect to make from a typical customer allows you to adjust spending to boost or decrease profitability and maintain the proper customer demographics.

Better Forecasting: 

CLV predictions support your ability to plan ahead for costs such as inventory, personnel, manufacturing capacity, and other expenses. Without a prediction, you run the risk of unintentionally overspending and wasting money or underspending and getting stuck struggling to meet demand.

Customer Lifetime Value Benefits

Enhance Customer Retention: Preventing client attrition and enhancing customer retention are two of the most important aspects of managing CLV. You can find out who your best customers are and what’s working well for them by tracking these facts and accurately segmenting your audience.

Drive Repeat Sales: Some retailers, tech firms, restaurant chains, and other companies have devoted clientele that keeps coming back. The average number of visits per year or over the customer lifetime can be tracked using CLV, and you can use that information to plan ways to boost repeat business.

Encourage Higher-Value Sales: Netflix is an example of a company that increased CLV through price increases, but it learned years ago that doing so too rapidly could drive away devoted customers. Here, finding the appropriate balance is crucial to success.

Boost Profitability: In general, a higher CLV should result in greater profits. You should notice the benefit on your bottom line as a result of keeping customers for a longer period of time and creating a business that encourages them to spend more money.

Customer Lifetime Value Difficulties

It Can Be Hard to Measure: 

Calculating CLV might be challenging if you don’t have quality tracking measures in place. On an automated dashboard that monitors KPIs, an enterprise resource planning (ERP) or customer relationship management (CRM) system can quickly make this information accessible.

High-Level Results Might Not Be Reliable:

The total CLV of a company can be a useful data point, but it can also mask issues with specific customer segments. More useful data could be obtained by segmenting the data based on customer size, location, and other factors.

Evaluating Customer Lifetime Value

Businesses using ERP systems don’t need to be concerned about the CLV maths. The calculations are all handled for you by the system. However, if you want to calculate client lifetime value manually, just use the methods and formula listed below.

How to Calculate Customer Lifetime Value in 3 Steps

1. Establish Your Average Order Worth: 

To begin, ascertain the average sale’s value. If you haven’t been following this data for very long, think about using a one- or three-month span as a stand-in for the entire year.

2. The average number of transactions each period should be calculated:

Do patrons frequent the business frequently, as may be the case at a coffee shop, or infrequently, as might be the case at a car dealership? A key factor in determining CLV is the frequency of visits.

3. How to Measure Customer Retention

Determine how long the typical customer stays with your brand before anything else. Some brands, such as those in the automotive and technology industries, inspire devotion across a lifetime. Others, such as convenience stores or retail chains, may have much less loyal customers.