What is Customer Lifetime Value (CLV)?
CLV is a metric businesses use to predict the total revenue they can expect to earn from a customer over the period of their relationship with them.
Formula
CLV= (Average Purchase Value × Purchase Frequency × Relationship Lifespan) − Customer Acquisition Cost
The Two-Step Approach to CLV
1. Historic Customer Lifetime Value.
2. Predictive Customer Lifetime Value.
Let’s break them down.
Historic Customer Lifetime Value
To track historic CLV, we naturally look to the past. How has a customer interacted with our brand? How much have they spent and how frequently? Then, we determine the average purchase value, purchase frequency, and customer life span during that period.
Predictive Customer Lifetime Value
Unlike historical CLV, which is based on past data, predictive CLV uses advanced algorithms and machine learning techniques to predict how much revenue a customer is likely to generate throughout their relationship with the business.
It can take into account customer acquisition costs, average purchase frequency rate, business overheads and more to give you a more realistic customer lifetime value prediction.
So, Why is CLV so Important to your Business’ success?
CLV not only saves you money, but it’s essential for strategic planning, resource allocation, customer-focused decision-making, and long-term profitability. By maximizing CLV, you can create sustainable growth and build strong, loyal customer relationships.
It also differs from your Net Promoter Score (NPS) and CSAT in that it is linked to revenue rather than a promise of loyalty and satisfaction.