You’ve probably heard the term “customer lifetime value” (CLV) before, but what does it really mean? And more importantly, how can you calculate it for your own business?
CLV is a metric that measures how much a customer is worth to your business over the entire course of their relationship with you. It takes into account factors like customer purchase frequency, average order value, and customer retention rates.
In this article, we’ll break down CLV and show you how to use it for your own business.
What is the customer lifetime value?
Customer lifetime value (CLV) is the total amount of revenue a customer generates throughout their relationship with your business. It’s a key metric for measuring the financial value of customers. CLV estimates how much you can expect to earn from each customer over time, based on their behavior and purchasing patterns.
CLV doesn’t just focus on your current customers. It also includes potential future sales or purchases that they may make in the future.
Customer context in CLV
In the business world, “customer” is a broad term that can be confusing. When you’re selling something, who exactly is your customer? Is it someone who buys what you have to offer right now—a potential customer—or is it someone who has already bought from you before and wants another product or service—an existing one? To clarify this concept in terms of CLV, a customer is anyone who has made a purchase regardless of whether they’ve dealt with you before.
In the context of calculating lifetime value (CLV), this means that the customer can be a new one or an existing one. But, to be clear, they’re both still customers in this context. This is important because it allows you to calculate the value of all customers—new and existing—to your business. Remember that when calculating CLV for any company’s business model, it’s essential to keep this definition in mind so you know what metric you’re measuring.
Life expectancy in CLV
Lifetime in CLV is the length of time a customer will remain a customer. It’s important to note that “lifetime” does not refer to the actual length of time you have known your customers, but rather how long they have been with you. This can be calculated by dividing their total purchases by the average price per purchase, or simply by taking their average order value and multiplying it by 365 (366 for leap years).
When calculating CLV, use an average order value (AOV) because it is easier than using annual revenue or monthly revenue. Using AOV is more accurate because most people don’t know if they’ll keep their subscription for one year or two years until after they’ve done some research online.
Another way to think about lifetime value is as follows: the longer someone spends with you, the more valuable he becomes because he has already invested more money into our products or services. Therefore, there’s less risk involved with making another purchase from you later down the line.
The value expressed in CLV
CLV is a metric that measures the worth of a customer over their lifetime. It’s used by marketers to identify how much they should spend on marketing campaigns and whether or not it’s worth investing in a new customer.
Let’s say you have an average monthly paying customer who spends $10 per month on your product or service. If that person sticks around for an average of one year, then CLV would be calculated as $10 x 12 months, which equals $120. You can use this CLV number to determine how much money you will spend on getting them as a new customer versus keeping those who already exist.
Conclusion
Customer lifetime value is a great metric to help you understand how much your customers are worth over time. It’s important to think about the long-term value of your customers, and not just in terms of revenue alone. If you can identify who your best customers are and why they stay with your company, then you can start focusing on those individuals more than others to increase retention rates in the future.