Customer Lifetime Value (CLV) = Total Customer Revenue – Total Customer Costs
Customer lifetime value is a powerful piece of business intelligence that informs an efficient strategy for business growth. Also known as CLTV, LCV and LTV, these calculations also provide a benchmark against growth goals and a vivid indication of company value. Customer Lifetime Value, which can be expressed in a detailed or more general formula, is typically defined as the value (in current dollars) of the net profit you can expect from a given customer’s purchases over the entire life of the customer relationship.
With a CLV calculation, you’re learning, in essence, what your average customer is “worth” to your company. Let's say a customer CLV is $60K. If it cost you $15K a year to service this customer and it cost $20K to aquire this customer. How long do you want to keep this customer? Obviously no more than 3 years or you'll only be breaking even and starting to lose money. Understnding this type of data helps a company be much more profitable and also helps to define the ideal customers for the marketing and sales team to focus on.
This information is helpful to the business owner or CEO as they develop strategies for:
Customer Lifetime Value (CLV) helps you allocate your customer procurement budget based on what the new client will actually bring to your firm. You’ll develop a better understanding of what you can spend to acquire customers.
Advertising and marketing targeting -
Use CLV data to help build more accurate and detailed customer personas. Customer lifetime value helps you spend advertising and marketing dollars wisely, focusing on the customer segments(s) that deliver the highest profit to your company.
CLV provides an excellent indicator and accurate measurement of marketing campaign performance. Get maximum return from often limited resources.
Impact of management strategies -
Learn the effect of certain high-level decisions on the value of customer assets. The CLV data can be used to encourage a company culture emphasizing long-term customer satisfaction, rather than solely focusing on short-term sales.
Retention efforts -
Decide what you should spend to retain specific customer segments. This helps you manage your customer relationships toward profitability. Measure customer loyalty, including factors such as purchase frequency and probability.
Individual-customer profitability -
You can calculate the profitability of a single customer. This info can be used by the sales team, for example: to focus their efforts on the most profitable new-customer demographic for a particular product/service and to point out upsell opportunities within the current customer base.
Company profitability/valuation -
CLV is a key data point in determining the valuation of your company. Knowing the value of your customer base, and expected growth, is useful when seeking additional rounds of funding or evaluating buy-out offers.