Customer Lifetime Value (CLV)

  • What is customer lifetime value?

  • How to calculate customer lifetime value

  • Why is customer lifetime value important?

  • Why loyalty programs increase customer lifetime value

What is customer lifetime value?

Many of the world’s most successful businesses have risen to the top because they understand the importance of increasing customer lifetime value (CLV), or the total value they can expect from a single customer over their lifespan.

Customer lifetime value (CLV) is an important marketing metric that represents the total amount a single customer spends on a company’s products and/or services for as long as they remain a client

How to calculate customer lifetime value

To calculate CLV, there are basically two models that companies use based on their brand strategy, customer care policies and other specific contexts of their business:

  • Historical CLV: This method looks at past data and provides insights on the value of customers based on their past interactions. This model works best for customers who show a high degree of homogeneity in their interactions with a business over their entire lifespan.  

  • Predictive CLV: This model takes the purchasing behavior of customers into account in order to predict how their future interactions will be. The predictive method can help a business improve their customer acquisition-activation-retention process significantly. 

The formulas for measuring CLV vary too. However, these formulas usually focus on either average transaction size or gross margin of a typical customer. In this post, we see how a CLV calculation model is built around gross margin:

CLV = customer lifespan × no. of transaction × average gross margin

Why is customer lifetime value important?

There are many benefits for businesses that shift from a short-term focus on quarterly profits to a long-term approach that prioritizes building enduring relationships with their customers. 

The rising cost of advertising and other customer acquisition measures have nudged many brands toward focusing more on the quality of their customer service and brand messaging.

When a company is less focused on increasing CLV, it will have a hard time growing its profits. In addition to helping a company with its profitability factor, the improvement of CLV ensures that the business: 

  • Spends fewer resources and less money on acquiring new customers.

  • Drives more sales without having to rely on massive discounts.

  • Is known as a brand that prioritizes customer support and has a significant loyal customer base.

  • Can use loyalty insights to send (hyper)personalized marketing messages.

  • Makes highly accurate future decisions about inventory, production capacity, etc.

Why loyalty programs increase customer lifetime value

A brand loyalty survey shows that when a company achieves a 7% increase in brand loyalty, the customer lifetime value of each client can rise by 85%. Not only do loyal customers bring long-term value to a company, but also they decrease the cost it has to pay to attract new customers. 

Customer Lifetime Value (CLV)

If implemented properly, loyalty programs can maximize customer satisfaction, leading to significantly higher CLV rates. 

Generally, loyalty programs help a business increase its CLV in two ways:

  • Increasing spending amount: The more a customer stays with you, the more opportunities you will have to gain their trust for bigger deals. Research shows loyal customers spend %31 more, on average, compared to new customers. 

  • Increasing repeat purchases: Loyalty programs can encourage your existing customers to welcome repeating their positive experiences with you. To achieve this goal, loyalty programs should focus on experiential rewards. 

Investment in quality loyalty programs will help a business reduce its customer acquisition cost (CAC) while nurturing its existing customers. To discover more about how to build the perfect loyalty program for your business, check out our “Definitive Guide to Customer Loyalty.”

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