CLV (Customer Lifetime Value)

What is CLV?

Customer Lifetime Value is a marketing metric (aka KPI) that reveals the profit that a customer will generate for us during a specific period of time. 

The CLV gives us a vision of the client based on the long term. In this way, we can make more efficient and profitable decisions. It is not about knowing how much the consumer spends at a specific moment, but rather about examining his behavior over time (quarters, semesters, years…).  

We should not confuse Customer Lifetime Value (CLV) with Customer Profitability (CP) or customer profitability.  The first predicts your future behavior and the second focuses on your past behavior.

Índice

  1. Importance and data of the CLV
  2. How to calculate CLV

Importance and data of the CLV

 

If we spend money on marketing it is to increase our profits and clientele. The CLV allows us to know how much we should invest in advertising, taking into account the value that the client will bring us.  

  • Frankly, we cannot imagine designing a profitable advertising strategy without first calculating CLV. It is an essential metric to improve the return on investment ( ROI ) of your campaigns.    

  • CLV allows you to identify which of your customers generate the most value for your business, so that it will be easier for you to focus on them, following the customer-centric philosophy.  

  • It is perfect for building customer loyalty.  All marketing experts know that a loyal customer is worth more than a new customer: their spending is higher and retention is cheaper than attraction.

  • One of the most relevant applications that CLV has refers to email marketing. Thanks to it we can budget it efficiently and improve its conversion rate.

The data provided by the Customer Lifetime Value is of great value for any brand or company, especially in the field of electronic commerce:  

  • Net profit  represented by the client.

  • Frequency  with which you buy.

  • Degree of fidelity. 

  • Expenses incurred to manage the relationship we maintain with the consumer.  

How to calculate CLV

There are actually several formulas to calculate this metric. The most used and simplest is the one that takes into consideration the following data:

  • Average customer life:  refers to the age of our customer or the time they spend consuming our brand.

  • Acquisition frequency:  refers to the frequency with which you purchase our products during 1 year.

  • Average spending:  refers to how much the customer spends divided by the number of purchases they make during that period.

The formula to calculate the Customer Lifetime Value will simply be to multiply these three factors.

CLV is one of the most important digital marketing KPIs  for your business. It is a very powerful tool that will help you build customer loyalty and improve your email marketing strategy just by performing a simple mathematical operation.