Customer Lifetime Value (CLV or CLTV)
If you are trying to keep the customers in your company and keep new customers shopping, you are in the right place! I tried to touch on Customer Lifetime Value, which is the most important answer to the questions on this subject.
Note: I usually will use some abbreviated words below:
- Customer Lifetime Value — CLTV or CLV
- Lifetime Customer Value — LCV
- Life Time Value — LTV
- Customer Acquisition Costs — CAC
Let’s continue…
The first questions that may come to mind when we say CLTV:
- Do you know how valuable each customer is to you?
- How do you improve new customer acquisition, increase repeat purchases, and increase profitability?
- Are you filling your marketing funnel with your best leads, leads and customers?
- Is it more profitable to retain existing customers or to acquire new customers?
- How much can you afford to spend on sales and marketing?
- What revenue can you predict in the future?
- How can you optimise acquisition cost for the maximum value?
- How much money should you invest in the retention of customers?
- What customer segments are the most valuable to the company?
What keeps a customer coming back?
Customers are gained and lost over the lifetime of any company, but a truly great product or service can keep customers well fed, yet still hungry for more — figuratively speaking. This appetite for more is what continuously adds value to the company over the span of their relationship with customers.
So, what is the CLTV ?
The present value of the future cash flows attributed to the customer during his/her entire relationship with the company.
In marketing, CLTV, LCV, or LTV is a prognostication of the net profit contributed to the whole future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques.
Another definition about CLV, sometimes referred to as LTV, is the profit margin a company expects to earn over the entirety of their business relationship with the average customer.
The CLV value must account for CAC, ongoing sales and marketing expenses, operating expenses, and, of course, the cost required to manufacture the product and services the company is selling.
Many companies take a short-sighted approach by overlooking this valuable metric and instead optimize for a single sale in the near term. It’s still important to find new customers for the growth of the company, but optimizing the lifetime value of existing customers is also essential for a company to sustain a viable business model.
In fact, an increase in customer retention rates by only 5% has been found to increase profits anywhere from 25% to 95%. With this in mind, increasing the expected CLV is essential.
CLV Calculation
Since CLV is a financial projection, it requires a business to make informed assumptions. For example, in order to calculate CLV, a business owner must estimate the value of the average sale, average number of transactions, and the duration of the business relationship with a given customer. Established businesses with historical customer data can more accurately calculate their CLV.
When you write CLV calculation to your browsers, you can encounter many websites where the calculation is made by entering the ready value.
So, how do companies calculate CLV?
First, calculate the LTV by multiplying the average value of a sale, the average number of transactions, and the average customer retention period.
Customer Lifetime Value = (Average Value of Sale) × (Number of Transactions) × (Retention Time Period) × (Profit Margin)
Or simply:
Customer Lifetime Value = (Lifetime Value)×(Profit Margin)
Here’s a quick example of the simple CLV formula in action:
Let’s say a X - company generates €3,000 each year per customer with an average customer lifetime of 10 years and a CAC of €5,000 for each customer.
The company could calculate CLV like this:
€3,000*1*10 — €5,000 = €25,000
Like it’s not bad, right? Looking at your CLV through this lens makes it easier to justify the sales and marketing budgets required to land new customers in the first place.
The simple approach can be used if a customer’s annual profit contribution remains somewhat consistent. For example, if you run on a subscription-based model with only one or two tiers, then each your customers can be expected to provide a relatively stable source of revenue.
Let’s leave it here for now and say to see you in my next and last article under CLTV.
References
1. https://www.questionpro.com/blog/customer-lifetime-value-clv/
2. https://en.wikipedia.org/wiki/Customer_lifetime_value
3. https://en.wikipedia.org/wiki/Net_income
4. https://en.wikipedia.org/wiki/Heuristic
5. https://en.wikipedia.org/wiki/Predictive_analytics
6. https://www.seedrs.com/academy/how-to-calculate-customer-lifetime-value/
7. https://hbr.org/2014/10/the-value-of-keeping-the-right-customers
8. https://www.profitwell.com/recur/all/calculate-customer-ltv
9. https://www.business2community.com/consumer-marketing/how-customer-value-affects-your-business-02095088
10. https://www.propellercrm.com/blog/customer-lifetime-value-clv
11. http://www.plusxp.com/2011/02/back-to-the-future-the-game-episode-1-review/
