Glossary - Customer lifetime value

Your marketing efforts are more impactful when you understand what's keeping your current audience and target customers happy. Various metrics measure customer satisfaction, but there’s only one that allows marketers to really understand their high-value customers and what keeps them spending: customer lifetime value. But what is lifetime value?

Customer lifetime value (CLV) definition

By tracking and measuring customer lifetime value (CLV), you can learn a lot about your customers. You can learn what your customers are worth, how much customers spend, and how you can increase that spend and, therefore, the average value of each customer.

What is customer lifetime value?

Customer Lifetime Value (CLV) is the average worth of a customer over the time they remain one of your brand’s most loyal customers. This time period is sometimes known as the average customer lifespan or average customer lifecycle. The very high customer lifetime value comes from how much revenue a single customer generates through sales, shares, and increasing brand recognition.

How to gather data for customer lifetime value

Lifetime value and, therefore, customer lifetime value, is a vital marketing metric that indicates how much a customer spends throughout their time with your brand. Another facet of this is predictive customer lifetime value, which uses historical data to predict what a various customer segment should spend across its lifetime based on their characteristics. Cohort analysis, the analysis of different customer segments with similar characteristics, can be a useful technique here.

How you can incentivize customer lifetime value

What is lifetime value and how long is the customer lifetime? The basic customer lifetime measurement runs the entire customer journey from their first purchase with you to their last. However, you can encourage your customer base to generate revenue in other ways, such as through other types of customer transactions. Customers tend to spend more where they know they're valued, and when customers feel valued, they'll tell their friends and family, so offer incentives for customers who:

• Provide customer feedback that drives brand recognition and sales
• Share your online content to encourage customers to try your products/services
• Spread word-of-mouth recommendations

Some marketers may even have affiliate programs, where their best customers gain incentives for speaking positively about their experience. Money spent on these incentives must be deducted from the customer lifetime value, but the long-term returns of building customer loyalty can be higher than the short-term outgoing costs. Improve customer retention and improve your bottom line.

How to calculate customer lifetime value

Calculating customer lifetime value is only possible when you understand exactly how much revenue a customer generates.

What is the customer lifetime value formula?

A simple customer lifetime value formula is:

Number of annual purchases x profit of each purchase x length of business relationship

For example, if you're a business software provider, you may have long-time customers whose average purchase frequency rate is three times per year. If the average order value is $1,000, then the value for the year is $3,000. You then measure customer lifetime, also in years, and multiply the annual amount by that figure. So, if your average customer lifetime is 7 years, the average lifetime value is $21,000.

$1000 x 3 x 7 = $21,000

The more detailed your customer data, the more accurate you can make your CLV calculations. For instance, knowing your average CLV is $21,000, means your most valuable buyers spend more than this.

Integrations of past data from your customer relationship management (CRM) platform, social media sites, and website help create a well-rounded picture of the customer behaviors driving revenue and brand loyalty.

Benefits of tracking CLV

Understanding CLV is just the first step in this overall business strategy. Once you know what keeps a customer coming back for more, you can begin replicating those actions across your entire customer base.

Increased customer retention rates

Tracking CLV very quickly highlights the segment of current customers who leave after a short time. Tracking CLV helps you discover what drives them away so you can make adjustments and cease those activities.

For example, you might be over-spamming customers who leave items in their shopping cart with reminder emails. While one or two reminders are helpful, dozens can be off-putting. If your CLV tracking highlights that there's a correlation between these emails and customer churn, you can take corrective action to improve your customer experience and reduce the volume of those emails.

Reduced customer acquisition costs

Your customer acquisition cost is how much you spend chasing a lead and eventually onboarding that customer. It's easier to sell to existing customers than new ones, but without new customers, your business can't grow. CLV helps you understand which customers bring the most money in, so you can adjust your target audience for lead generation. By focusing on a more finely tuned segment of the market, you'll spend less on your marketing efforts here, naturally lowering acquisition costs.

Improved customer relationships

Knowing what makes your customers tick means that meeting satisfaction targets and extending the customer lifetime is less "hit and miss" and more "smash hit." Taking the time to know what drives a higher CLV means you can focus on those aspects when interacting with every existing customer. For example, a customer with a high CLV may be one of your loyal customers because you followed up on every query and offered relevant additional products. It stands to reason, then, that if you follow those practices with other customers, their CLV will also increase—and their satisfaction with your service.

What is lifetime value? CLV summed up

By tracking customer lifetime value and understanding what impacts it, you can increase customer loyalty and customer value. The more loyal a customer is, the more likely they are to stay with your brand, so CLV monitoring helps you increase customer lifetime and, therefore, customer lifetime value. You’ll discover insights into what makes your most valuable customers happy so you can build better, stronger customer relationships.