Customer Lifetime Value (CLV)

The Customer Lifetime Value (CLV) is the total value a customer brings to a business over their lifetime as a customer.

Customer Lifetime Value (CLV) is the total financial value of a customer over the course of their lifetime with a business. CLV is calculated by multiplying their average total spending with the number of years they stay with the business. It is an important metric for businesses to track as it helps them accurately calculate their return on investment and how much it is worth investing in customer acquisition and retention activities.

Businesses need to have a good understanding of their Customer Lifetime Value when three key decisions need to be made:

There are several methods businesses can use to measure Customer Lifetime Value. The simplest method is the single-period method, where the customer’s purchase in the current period is projected over a period of time to calculate the customer’s future spending. This method does not take into account changes in customer behavior or any external factors.

More accurate methods include discounted cash flow and cohort analysis. These methods are more complex and take into account customer behavior over time, as well as external factors such as competition and changing consumer trends.

When it comes to customer retention strategies, Customer Lifetime Value is also an important metric to track. Retention of customers can help businesses improve their Customer Lifetime Value since customers will purchase more from a business they trust and can recognize the value of.

Let’s take a look at an example to illustrate the concept of Customer Lifetime Value.

Say Bob, a customer, buys a product worth $50 from a business. On average, Bob spends $50 every month on this product from the business.

If Bob stays with the business for 12 months, the business’ Customer Lifetime Value for Bob will be $600 (12 x $50).

However, if Bob stays with the business for 24 months, the business’ Customer Lifetime Value for Bob will be $1200 (24 x $50).

Thus, we can see how businesses can benefit from a higher Customer Lifetime Value as customers that are retained longer have more potential to bring in revenue and thus higher returns.