What is Customer Lifetime Value (CLV)?
Customer Lifetime Value or CLV is a way of measuring how much value we place on customers based on the relationship they have with our company over time.
It is one of the email marketing metrics, and it helps us to know the benefit generated by each type of customer depending on a series of factors such as the value of their purchases, the size of their social networks, or the relationship they have with your brand. For example, it is worth preserving in the long term a regular customer who also contributes ideas, communicates with your brand, talks about it and defends it against the competition.
As you can see, the lifetime value of the marketing customer goes beyond the value of their purchases, and encompasses the entirety of their relationship with your brand.
Why is it so important to calculate the CLV (Customer Lifetime Value)?
Knowing the life value of a customer is essential for your company for several reasons:
- Helps develop business strategies to acquire new customers and retain existing ones while maintaining profit margins.
- It is used to estimate the investment you must devote to your marketing strategy and your best email marketing campaigns to make it profitable.
- It helps you to better understand your customers and the reasons that lead them to purchase your goods and products and to be loyal to your brand.
- It is a tool that facilitates a long-term vision of the company, which consequently leads to offering a better customer service to promote its loyalty. It can also support your ROI.
An important fact to consider is that it costs less (5 to 25 times less) to keep an existing customer than to acquire a new one. Therefore, increasing the value of your existing customers is the perfect way to grow your business.
How to calculate the CLV (Customer Lifetime Value)?
There are different types of CLV calculations. Here are some of the most frequently used formulas to calculate it:
his is the most simplified way to calculate it, and for this we need the following data: average annual customer spend (you can use, for example, the average spend per visit, multiplying the average purchase by the frequency of purchase) and the average lifetime of that customer in your company (measured in time).
This is the formula for calculating the simple CLV:
Simple CLV = annual expense (no. of visits* average expense) * half-life
This type of CLV is probably the most widely used, as it considers the costs of providing such a product or service for your company. That is, your profit margin.
To calculate this, we need again the following data: average lifetime of the customer, average purchase value and frequency of purchase (together they serve to calculate the average annual expenditure of the customer). In addition, you also need the profit margin, which is calculated by subtracting the purchase price at the expense of producing the product.
Its formula can be simplified as follows:
Real CLV = simple CLV * profit margin (production expense – purchase price)
To calculate the traditional CLV, we take as a basis the simple CVL (average customer spend) and we also need the following data: gross margin of the customer’s average life, customer retention rate and discount rate (also called money flow).
The customer’s gross margin per lifetime is the profit margin based on the customer’s average lifetime (simple CLV * profit margin).
Customer retention rate measures the percentage of customers who return to your business during a certain period of time compared to a previous period of the same duration. It is calculated with the following data: number of initial customers we had (S), number of end customers (E), and number of new customers gained in that period (N). The formula that will give us the retention rate is: (E –N)/S.
Finally, you also have to consider the cash flow or discount rate, which is the percentage variation in the value of money over the next few years.
Once you have calculated all these data, apply them in the following formula:
Traditional CLV = gross margin * (retention rate/ 1 + cash flow – retention rate)