What Is CLV: definition, formula, and improvement methods
CLV, also known as customer lifetime value (LTV or CLTV) and lifetime customer value (LCV), is the revenue a business receives from a customer over the length of the customer/business relationship.
Knowing your average customer lifetime value helps predict future revenue and evaluate your churn reduction efforts. Generally, businesses strive to increase their average customer lifetime value through nurturing long-term customer relationships.
CLV tells you how well you are connecting with your customer base, how much your customers like your product, and where there is room for improvement. It is the type of information every business needs to know to plan their further development strategy.
How to calculate CLV
There is a simple formula for calculating CLV. However, it requires a couple of numbers, like the average value of purchase, the number of times your customers make purchases a year, as well as an average length of your customer relationship:
CLV = (average value of purchase) x (number of times the customer makes a purchase each year) x (average length of the customer relationship in years)
You can also calculate CLV using months instead of years for more precise results.
Predictive CLV is a bit more complicated, as you will need to know a few more numbers. There are several models used to calculate predictive CLV, they are all very complex. These models include probability modeling approaches, and generally speaking, companies hire out the crunching of these numbers to analysts due to the complexities.
The reason predictive CLV is important is self-explanatory: it helps predict what will happen in the future so companies can plan ahead. Making business decisions solely on what has already happened isn’t looking forward, and with predictive CLV, a chance to look into the future is opened.
Importance of segmentation based on CLV
Segmentation is extremely important. Let’s imagine a client – Jenna – who has been going to Starbucks before work and ordering a venti black coffee every day for 10 years. Her customer lifetime value will be higher than that of another client – Paul – who’s been going in once every 3 weeks for a grande vanilla latte for 4 years, even though on the surface, the latte costs more than the black coffee.
Calculating their customer lifetime value will show that the black coffee regular Jenna is the one who should get more attention. The company wants black coffee regular to stay black coffee regular because they are the one who’s creating a lot of consistent revenue, as opposed to vanilla latte occasional Paul who is just a little tiny blip in their revenue stream.
For Starbucks, the cost of keeping the regulars is much lower than enticing the occasionals, and to keep their regulars’ CLV high, the company uses a number of techniques described below.
How to improve customer lifetime value
Considering the odds of selling to an existing customer is 60-70% but only 5-20% to a new customer, investing your more time and resources into doing business with your existing customers is the key to sustaining a high CLV.
You make more money off existing customers than new customers, period. Keeping your existing customers happy so they stay with you longer requires implementing certain techniques and tactics. There are several ways to do that:
- Keep in touch, consistently remind customers about your product via various channels
- Use social media to interact with your customers
- Segment your audience and send tailored offers, e.g., don’t send an email about steel-toed boots to those interested in buying an evening dress
- Set up a rewards program that encourages repeat purchases
- Include freebies, such as samples and freemiums, which will encourage new purchases
- Send out regular promo codes, sales, and special offers
- Upsell: for example, ask the black coffee regular if they would like a breakfast item with their drink
- Set expectations, then exceed them: underpromise and overdeliver
- Make it easy to do business with you: easy access to products, easy communication and help, easy exchanges and returns
- Be friendly, send out welcome emails, thank you for your purchase emails, etc.
Why you should know your customer lifetime value
Customer lifetime value is an easily calculated, deep look into your customer base that reveals the strength of your brand loyalty. Knowing your CLV helps balance spending on acquiring new and keeping existing customers (by minimizing the churn rate). At the same time, determining which segments of your client database have the highest CLV will help you improve the buyer persona profile.
Improving the CLV should be every company’s priority.