Understanding CLV (Customer Lifetime Value)
Based on business terminology, the term ‘Customer Lifetime Value’ seems like a really scholarly way of saying, “how much money do we stand to make from this customer?” But that oversimplified translation doesn’t quite do it justice. CLV, short for Customer Lifetime Value, is a metric that predicts the net profit a business can make from the entire future relationship with a customer. In simpler terms, it tells you how valuable a customer is to your business during the course of your relationship.
The idea is that as a business, you’d like to maximize the profits you make from each customer. The higher the CLV value, the greater the profits. But what creates this value? Several factors come into play here. The longevity of your relationship with the customer, the frequency of their purchases, and the nature of your interactions are all constituent components of CLV.
Significance of CLV for Businesses
CLV is not just an acronym that gets thrown around in business school. It’s an essential tool for businesses to understand their customer base and drive their growth strategies. Here’s why:
1. Discovery of high-value customers: Not all customers are created equal, at least not in terms of their value to your business. Understanding CLV allows you to identify customers who may not be the big spenders today but have the potential to be your top, loyal customers in the future.
2. Efficient allocation of resources: Once you identify these high-value customers, you can then start allocating more resources towards retaining them. This could be anything from sending personalized offers, giving them exclusive access to new products, or simply improving the customer service they receive.
3. Business forecasting: CLV can also help with business forecasting. It’s always better to make business decisions based on data, and knowing the value of your customers can guide your decisions about areas like marketing budgeting, sales strategies, and product development.
Calculating CLV
Although it may initially seem rather complex, the concept of CLV is actually based on a simple equation. There are several ways to calculate it, each with varying levels of complexity and data requirements.
A basic version of the CLV formula is:
CLV = (Average Purchase Value per customer X Average Purchase Frequency per customer) X Average Customer Lifespan
– Average Purchase Value per customer: This is the average amount of money a customer spends in a single transaction with your business.
– Average Purchase Frequency per customer: This is the average number of times a customer buys from your business in a given period.
– Average Customer Lifespan: This is the average amount of time a customer continues to buy from your business before they stop.
For example, if a customer, on average, spends $50 per month with your business (Average Purchase Value), makes three purchases each month (Average Purchase Frequency), and continues to do so for five years (Average Customer Lifespan), the CLV of this customer would be $50 X 3 X 12 months X 5 years = $9,000.
Remember, this is a basic version of the CLV calculation and there are more advanced formulas out there that can take into account factors like customer segmentation, discount rates, and churn rates.
In conclusion, CLV is an extremely valuable piece of information for any business to have. It’s a way of calculating the value of a customer over the course of their lifetime relationship with your business, rather than just taking into account their present value. By focusing on increasing the CLV of your customers, you can drive long-term business growth and success.