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What is Customer Lifetime Value (CLV)?

  • Bhumika Dutta
  • Apr 01, 2022
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Because of the high level of competition in the market, customers frequently purchase items or services from a range of firms in the same industry. As a result, businesses win and lose consumers over time, and only a quality product or service can entice them to return again and again.


One of the most essential eCommerce KPIs is customer lifetime value. Customers' demands and expectations are frequently unmet, which increases the customer's life worth. We will learn the definition of CLV and how to calculate it in this blog.



What is Customer Lifetime Value?


Customer Lifetime Value (CLV) is the overall money you make from a customer over time as an eCommerce firm. It considers all of their previous orders. It's a useful indicator for assessing consumer happiness, loyalty, and brand viability.


Product-market fit, brand loyalty, and recurring income from current consumers are all indicators of high CLV. If eCommerce organizations want to maintain stable growth, they should track and maximize customer lifetime value.


Customer lifetime value is used by businesses to determine the most valuable customer categories. The bigger a customer's lifetime value rises, the longer they continue to buy from a firm. The relevance of the CLV is not in lowering customer acquisition costs, but in lowering customer acquisition and retention expenses.


How to Calculate CLV?


The easiest method for calculating CLV is to:


[CLV = average purchase value x average gross margin x average length of the customer relationship (in years)]


This is the simple predictive CLV, and it is the most efficient way to determine the CLV. The predictive CLV is based on predictive analysis and considers prior transactions as well as numerous behavioral variables to determine an individual's lifetime worth. This value improves with each purchase and interaction, making it a more accurate means of calculating customer lifetime value.


Another predictive CLV is detailed predictive CLV:


[CLV = CLVs * Monthly retention rate + Monthly discount rate – Monthly retention rate]


Keep in mind that, because this is simply a projection, the predictive CLV will never be 100% correct. One may obtain a highly accurate client lifetime value if they tailor the formula for their firm.


There are 2 other methods of calculating CLV as well. Let us start with a simple formula for calculating CLV:


[CLV = customer revenue – the cost of acquiring and serving that customer]


Let's assume you give your mum the same $70 floral arrangement every year for Mother's Day. If you've been doing this for five years, your florist has a lifetime worth of $350.


However, because most firms are more intricate than that, this simple rule does not always apply.


The historical CLV calculating method is:


[Historical CLV = (Transaction 1 + Transaction 2 + … + Last transaction) * Average gross margin]


The total gross profit from all previous purchases for a single consumer is the historical CLV. Customer service costs are factored into the historical CLV (cost of returns, acquisition costs, cost of marketing tools, etc.). The drawback to this technique is that it might be difficult to compute on an individual basis, especially if you want the statistics to be updated regularly.


Customer cost:


Another significant statistic, CAC, works hand in hand with CLV (customer acquisition cost). This is the money you spend on advertising, marketing, special deals, and other methods to acquire a new consumer. Customer lifetime value is only truly meaningful when the CAC is included.


The cost to serve is another element to consider. This is a portion of the cost of doing business, and it entails everything you do to get the product or service into the hands of the client and perform the functions they require. For example, logistics, physical site overheads, contact center fees, and so on.


Breaking this down by customer allows you to get a more detailed understanding of these expenses, such as if your high CLV customers are the same price as your low CLV customers, and whether certain customers are more expensive than others. Even though their CLV appears to be high, you may be losing money if the cost of serving an existing client gets too high.


Unlike client acquisition, which is a one-time cost, the cost of serving a customer may change over time. To return to our paid TV example, your service cost may be greater in the first year of a contract, but it will steadily decrease as the consumer stays with you longer. As a result, if your renewal rates fall, your average service cost will certainly climb, resulting in a decrease in profitability.


Why is Customer Lifetime Value Important?


Here are a few reasons why knowing your CLV is critical:


  1. It has a direct impact on your revenue:


The CLV determines the consumers who generate the greatest money for your company. This enables you to provide these existing clients with products/services that they enjoy, resulting in them spending more money with your business.



  1. It improves consumer retention and loyalty.


Customer loyalty and retention tend to grow when a firm optimizes its CLV and constantly offers value – whether in the form of exceptional customer service, products, or a reward program. A decreased churn rate, as well as a boost in referrals, favorable reviews, and revenue, are all benefits of having more loyal consumers.



  1. It aids in the identification of your ideal clientele.


When you know a customer's lifetime value, you also know how much money they spend with your company over time. When you know a customer's lifetime value, you also know how much money they spend with your company over time.



  1. It lowers the cost of acquiring new customers.


Getting new clients may be expensive. The acquisition is often five times more expensive than retention, according to a recent article in The European Business Review. Furthermore, according to research done by Bain & Company, a 5% improvement in retention rate might result in a profit gain of 25 percent to 95 percent. These figures illustrate that your organization must identify and nurture the most important consumers who connect with it. You'll have larger profit margins, higher client lifetime values, and lower customer acquisition expenses if you do it this way.


Also Read | What is Network Marketing?


How to improve the CLV of any company?


Creating a long-term positive relationship with the consumers is what CLV is all about. As a result, nurturing those client connections is a natural method to increase the CLV stats. Following are a few ways:


  1. Invest in the customer experience:


Every interaction between a consumer and a brand, including shop visits, contact center inquiries, sales, product use, and even their exposure to advertising and social media, is considered customer experience.


Improving the customer experience is a company-wide initiative that is frequently handled with the help of a customer experience management program. This is a method of watching, listening and making adjustments that result in a long-term improvement in how consumers feel and their proclivity to remain loyal.



  1. Make sure your onboarding process runs smoothly:


Consumer experience begins the minute a potential customer comes into contact with your brand, but firms frequently overlook the fact that customers require care after they have made a purchase. 


Make sure the onboarding process is tailored to your clients' needs and is as straightforward as feasible to require the least amount of work from them. Personalization and conveying the added value you offer your clients should be top priorities.



  1. Create a customer loyalty program:


A loyalty program encourages repeat business by providing discounts or other perks. It might be in the form of a loyalty card or app, or a points system that customers earn when they shop.


Although a loyalty program isn't a silver bullet for client retention, when properly conceived and executed, it may produce excellent benefits. We've compiled a list of helpful hints for implementing a successful customer loyalty program.



  1. Provide omnichannel assistance:


Customers will have different preferences for how they interact with you, therefore your help channels should match that. Rather than merely delivering what you believe your customers would want, do some research to find out which channels they prefer. 


To deliver an excellent customer experience with omnichannel support, get consumer feedback on self-service alternatives and frontline encounters.



  1. Close the loop on dissatisfied consumers:


Closed-loop feedback is a great tool for reducing churn and converting unsatisfied consumers into new committed clients. In this concept, companies proactively reach out to critics or complainants and intervene before problems grow and the customer connection breaks down. 

In many circumstances, the business's targeted effort and active listening strengthen the connection even farther than it was before. It's a useful addition to your customer experience management strategy.

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