Customer lifetime value (CLV) is the amount of profit a customer delivers to your company for as long as the customer is buying from you. It’s typically calculated as the net present value (the value in today’s dollars) of the profit you’ll earn from all of a customer’s purchases over time.
When you understand how to calculate customer lifetime value, you have an extremely powerful tool that helps with:
Using customer lifetime value calculations becomes more important as your marketing budget rises and your customer base grows. Yet even an early-stage company can benefit by using simple CLV estimates.
|Best Case||Neutral Case||Worst Case|
|You know how much an average customer in each of your segments is worth to you.
You focus your acquisition efforts on your most valuable segments, and you know how much you can spend to profitably retain your customers.
|You have an idea of who your most valuable customers are, but you’re not really sure how much you should spend to acquire or retain them.
Your ROI measurements for your marketing campaigns are probably very general, though still helpful.
|You don’t know how to calculate customer lifetime value, so you don’t know how much a customer is worth or how much you should spend on acquisition or retention.
You’re not sure what your marketing budget should be, and you’re not confident in the quality of the investments you’re making.
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You’ll want to look at your customer lifetime value for different groups of customers, so make sure you’ve defined your segments. CLV is a valuable tool to improve your marketing campaigns and budget; it’s also used when you’re working on customer retention and ROI.
There are several figures you’ll need for your CLV calculations:
Companies calculate these figures differently, so your first step is to confirm the formulas your company uses.
The CLV calculation is most valuable when you measure it by customer segment – similar groups of customers who use your products/services in a similar way.
Look at your customers’ buying patterns and calculate the total number of purchases they make and the time between those purchases.
Once you know the average lifetime, you’ll calculate
Once you have a CLV for each customer segment, you can
Keep applying CLV and using it in your marketing strategies and plans. When you use CLV and ROI in all of your campaigns, you have powerful tools to help you grow your company’s revenue and profit.
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