Customer Lifetime Value (CLV): Why it matters to every customer-centric organisation.
- Mario Holt
- Aug 12, 2024
- 6 min read
You've probably heard of Customer Lifetime Value (CLV), but do you know what it means and why it's important? CLV is an important indicator of a company's success, because it measures the total value a customer generates throughout their relationship with a company. A higher CLV means higher profitability for the business. In this blog post you will find out how to increase the CLV of your e-commerce customers, how to calculate it and what the benefits are.
For whom is the CLV interesting and relevant?
The answer is: not just marketing, but also sales, customer service and management.
Marketing should be interested in CLV because it allows them to better target their campaigns to the most profitable customers and reduce the cost of acquiring new customers. Marketing can also use CLV to improve customer segmentation and create personalised offers.
Sales should be interested in CLV because it allows them to adapt their sales strategies and increase customer loyalty. By understanding CLV, sales can sell the right products and services to the right customers, increasing revenue per customer.
Customer Service should be interested in CLV because it can increase customer satisfaction and loyalty. By knowing the CLV, customer service can prioritise customer requests and give priority to the highest value customers. In addition, customer service can use CLV to analyse customer feedback and improve service quality.
Management should be interested in CLV because it can ensure the long-term profitability and success of the company. By understanding CLV, management can make strategic decisions that maximise the value of customer relationships and increase the company's competitiveness.
As you can see, CLV is a relevant metric for almost all customer-facing areas of an organisation. To learn more about how to calculate and increase CLV, read on in this blog post.
How to calculate customer lifetime value?
In order to calculate Customer Lifetime Value (CLV), you need to combine appropriate data from different sources. These include the number of customers, the average purchase frequency, the average order value, the average customer lifetime value and the customer churn rate. This data can come from the CRM system, the e-commerce system, the analytics tool or other sources.
A step-by-step guide to calculating CLV
A possible step-by-step guide to calculating the average Customer Lifetime Value (CLV) is as follows
Step 1: Determine the average revenue per customer by dividing the total revenue of your company or channel by the number of customers. For example, if your company made 1 million € in revenue in a year and has 10,000 buying customers, the average revenue per customer is 100 €.
Step 2: The repurchase rate is calculated by dividing the number of customers who have bought more than once by the total number of customers. For example, if 8,000 out of 10,000 customers have bought from you more than once, the repurchase rate is 0.8 or 80%.
Step 3: Determine the number of active customers on a specific date by counting the number of customers who are still active on that date. For example, you could choose 31 December 2023 as the cut-off date and then determine the number of customers who are still buying from or interacting with you on that date.
Step 4: Determine the number of new customers over the period by counting customers who made their first purchase from you. For example, in the period 2023, only customers who made their first purchase in that year should be counted.
Step 5: Identify the number of customers at the start of the time window. This is done by simply counting the number of purchases already made on that date. For example, if the window covers the year 2023, count how many customers have already bought from you on 1 January 2023.
Step 6: The calculated values are entered into the formula for the average customer lifetime value of the customer base. This gives you the result for the customer value of your customers.
Here is a sample calculation if you have the following values:
Average sales per customer: 100 Euros
Repurchase rate: 0.8
Number of customers on a particular date: 10,000
New customers in the window: 2,000
Time window: 1 year
Number of customers at the start of the analysis period 8,500
This value is then divided by the number of customers (10,000).
The average CLV over the next 17 years is therefore €1,333.
Is CLV everything or are there limitations and potential errors when using CLV?
There are limitations and potential errors in the calculation and application of Customer Lifetime Value (CLV) that you should be aware of.
Here are a few examples and important tips:
CLV is based on assumptions and forecasts that may not always be accurate. For example, a customer's buying behaviour may change over time, or the customer may switch to a competitor. CLV is therefore not an exact figure, but an estimate that is subject to uncertainty. Tip: Do not treat the CLV as a fixed value and update it regularly.
The CLV can vary depending on the formula used and the factors included. For example, there are different ways of calculating customer lifetime value, repurchase rate or customer acquisition cost. In addition, some factors such as satisfaction, loyalty or word-of-mouth can be difficult to quantify. The value of customer lifetime value is therefore not always comparable, but depends on the calculation method chosen and the data available. Tip: Customer lifetime value needs a clear definition and a standardised method of calculation. Only then can it be compared, for example, between customer groups, different product ranges or regions.
Customer lifetime value is an average, that does not take into account differences between individual customers. For example, a customer who frequently buys small quantities of goods may have a higher customer lifetime value than a customer who buys infrequently but in large quantities. In addition, CLV cannot capture a customer's individual needs, preferences and expectations. CLV is therefore not sufficient for personalised customer approach and customer loyalty. Tip: Do not use CLV as the sole criterion for customer evaluation and segmentation, but always in combination with other KPIs.
As you can see, CLV is a useful but not perfect indicator of a customer's value to an organisation. A critical review of CLV and the addition of other KPIs and information is necessary to get a complete picture of customers.
How can you increase customer lifetime value (CLV)?
There are several things you can do to increase CLV, regardless of whether your shop is B2B or B2C.
Examples are:
Increase customer loyalty and satisfaction: This basic measure can be used in both B2B and B2C. By providing good customer service, high quality and added value, customer loyalty, word of mouth and repurchase rates can be increased. It can also reduce customer churn and complaints, leading to higher customer lifetime value and long-term customer retention.
One effective measure is to increase the average order value. By providing incentives for customers to buy more or more frequently, sales per customer can be increased. Examples include discounts, vouchers, loyalty programmes, cross-selling and up-selling.
Increasing customer lifetime is particularly important in the B2B sector. By offering customers long-term partnerships, their loyalty and repeat business can be increased. For example, contracts, subscriptions, maintenance services, training or support can be offered.
Tip: Customer acquisition costs are sometimes included in the CLV calculation. This metric can be used to reduce customer acquisition costs in both B2B and B2C. By optimising marketing spend and measuring the effectiveness of campaigns, the cost per customer can be reduced. For example, targeted advertising, personalised approaches, referral marketing or customer relationship management (CRM) tools can be used.
Conclusion
In conclusion, Customer Lifetime Value (CLV) is an important metric for your business if you want to optimise your customer relationships and sales. CLV gives you a comprehensive view of the economic value that a customer brings to the company over the course of their relationship. A higher CLV indicates stronger customer loyalty and a more effective business strategy.
It is clear that Customer Lifetime Value (CLV) is not only a tool for measuring customer value, but also for guiding strategic decisions that can help improve business performance. Companies that understand and use CLV are better positioned to build long-term customer relationships and increase market share. By continually investing in improving customer relationships and adapting their strategies, they can increase CLV and ensure long-term success.
Comments