Customer lifetime value (CLV) is a business metric that measures how much a business can plan to earn from the average customer over the course of the relationship. Differences in products, costs, purchase frequencies and purchase volumes can make customer lifetime value calculations complex. However, with the right tools, you can find customer lifetime value in just a few clicks. Show
With an understanding of CLV, you can make better-informed marketing and sales decisions, among other benefits. This guide provides insights about customer lifetime value, how to calculate this metric and more useful information about CLV that business owners and managers should know. What Is Customer Lifetime Value (CLV)?Customer lifetime value (CLV) is a measure of the total income a business can expect to bring in from a typical customer for as long as that person or account remains a client. When measuring CLV, it’s best to look at the total average revenue generated by a customer and the total average profit. Each provides important insights into how customers interact with your business and if your overall marketing plan is working as expected. For a more in-depth look, you may want to break down your company’s CLV by quartile or some other segmentation of customers. This can give greater insight into what’s working well with high-value customers, so you can work to replicate that success across your entire customer base. Note: There are multiple definitions of CLV: Basic calculations that only look at revenue and more complex equations that factor in gross margin and operational expenses like COGS, shipping, and fulfillment. Marketing expenses can be included but are sometimes left out if they are too variable. For the sake of simplicity, we’re using revenue throughout this article. Key Takeaways
Customer Lifetime Value (CLV) ExplainedCustomer lifetime value boils down to a single number, but there may be significant nuances. By understanding the different parts of your CLV, you can test different strategies to find out what works best with your customers. Thanks to its simplicity, CLV can be an important financial metric for small businesses. For example, let’s examine how a grocery chain may look at CLV. Based on data in the company’s ERP system, it can see that the typical customer spends $50 per visit and comes in an average of once every two weeks (26 times per year) over a seven-year relationship. The grocer can find its CLV by multiplying those three numbers — 50 x 26 x 7 — for a value of $9,100. But why does that number matter? We’ll dig into the details in the next section. Why Is Customer Lifetime Value Important to Businesses? Why Does It Matter?In the example above, we figured out the average lifetime value of a customer for a grocery store. But why do businesses care about CLV? Here are a few key reasons to track and use CLV:
Advantages of Customer Lifetime Value
Challenges of Customer Lifetime Value
How to Measure Customer Lifetime ValueBusinesses with ERP systems don’t have to worry about the math behind CLV. The system does all of the calculations for you. If you’re looking to measure customer lifetime value manually, however, you can follow the steps and formula below. 4 Steps to Measure Customer Lifetime ValueThis graphic shows how customer lifetime value can be calculated through average order value, number of transaction, and customer retention rates.
Customer Lifetime Value FormulaHere is the formula for customer lifetime value: CLV = Average Transaction Size x Number of Transactions x Retention Period Each of these inputs acts as a lever you can pull to grow your CLV. However, every move your business makes may have unintended consequences that impact CLV. For example, a price increase may improve your average transaction size, but it could push customers to shop less often or look for lower-cost alternatives. Experienced marketers familiar with the four Ps of marketing — product, place, price and promotion — have a strong understanding of how marketing efforts directly influence customer lifetime value. Customer Lifetime Value ExamplesThe best way to understand CLV is through examples. Here are examples from three very different industries to better demonstrate how customer lifetime value may impact your company: Coffee shop A coffee shop is a perfect starting example for CLV, as it is easy to understand even if you don’t have an extensive business background. Let’s say a local coffee chain with three locations has an average sale of $4. The typical customer is a local worker who visits two times per week, 50 weeks per year, over an average of five years. CLV = $4 (average sale) x 100 (annual visits) x 5 (years) = $2,000 Car dealership A car dealership has a much higher average sale amount with a lower purchase volume. In this example, we'll assume someone buys a new car every five years for $30,000. Customers are loyal to this brand and tend to keep buying from it for 15 years. CLV = $30,000 (average sale) x .2 (annual purchases) x 15 (years) = $90,000 Software as a Service (SaaS) subscription For the last example, let’s assume an online video streaming service has multiple price plans, but the average customer spends $17 per month. Customers typically subscribe for three and a half years and use automatic monthly payments. CLV = $17 (average sale) x 12 (annual purchases) x 3.5 (years) = $714 14 Ways to Improve CLVThere are many different strategies companies can adopt to boost their CLV. Here are 14 ideas to consider if you’re trying to earn more revenue from the typical customer:
Top Track, Measure and Improve Customer Lifetime Value With NetSuiteBusiness software suites like NetSuite have sophisticated analytics capabilities that can provide various value calculations, removing the need to manually cobble together metrics with a spreadsheet. NetSuite provides dashboards and tools to calculate CLV instantly, including the option to slice up the data by segment. In addition, NetSuite offers CRM and ecommerce systems that can track all the data needed for multi-channel businesses to calculate CLV and understand how it changes over time. These systems are all part of a unified platform that presents a central source of information for the entire organization without the need for third-party integrations. That makes it much easier to find the KPIs that help you understand the performance of your business. Customer lifetime value is too important for any organization to ignore. When you have the right tools and spend time understanding and finding ways to boost CLV, your business should enjoy increased growth and success as it moves forward. Customer Lifetime Value (CLV) Frequently Asked QuestionsWhat is meant by customer lifetime value?Customer lifetime value refers to the entire amount a business earns from the average customer over the course of their relationship with the business. What is customer lifetime value with an example?Customer lifetime value represents the total earnings from a customer over the duration of their relationship with the business. This helps a company forecast profitability, set customer acquisition budgets and determine goals for growth and improvement. What is the value of a customer called?What is customer lifetime value (CLV)? Customer lifetime value is the total amount of money a customer is expected to spend with your business, or on your products, during the lifetime of an average business relationship.
Is a measure of the value of a good or service to a customer?Customer value measures a product or service's worth and compares it to its possible alternatives. This determines whether the customer feels like they received enough value for the price they paid for the product/service. We can look at customer value as insight into buyer's remorse.
What is a total customer value and total customer cost?In the simplest form, customer perceived value is total customer value minus total customer cost. Total customer benefit is the total monetary benefit of the product and the total customer cost is the total monetary costs the customer expects to incur in evaluating, obtaining, and using the product.
What is the value of the product and service called?Value-added is the difference between the price of a product or service and the cost of producing it. The price is determined by what customers are willing to pay based on their perceived value. Value is added or created in different ways.
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