Customer Lifetime Value (CLV), or the customer life cycle, is a fairly important indicator in customer relationship management strategies. Understanding and measuring CLV allows companies not only to optimize the costs of acquiring new customers, but also to maximize profits from existing ones. What exactly is CLV and why is it so important for business and e-commerce , and what methods can be used to accurately estimate it?
Customer Lifetime Value (CLV), or the lifetime value of a customer, is a metric that allows companies to estimate how much revenue a given user will generate throughout their relationship with a brand. CLV is a key element of a customer relationship management strategy because it allows companies to better understand the profitability of their marketing and sales activities. By analyzing CLV, companies can identify the most valuable customers and then adjust their activities to increase their loyalty and extend the period of cooperation. As a result, CLV helps not only optimize the costs associated with acquiring new customers, but also maximize the profits from long-term relationships.
A frequently used variation of CLV is LTV ( Loan to Value ), which also stands for Customer Lifetime Value.
CLV can be used in such a way that, for example, a brand introduces a new product to the market and then measures the CLV of customers who bought it. Then, it analyzes the CLV over a period of, for example, 3 months, 6 months or specific quarters. Thanks to this, it is able to estimate the forecasted revenue from the sale of subsequent, new products. Customers with a low CLV value may not be worth the time, while loyal ones may represent a significant potential profit.
There are several ways to measure the customer lifecycle. One of the simplest is to use a seemingly complicated but effective formula that allows you to estimate how much income you can expect from the average customer over the course of their relationship with your brand. The basic steps include:
As already mentioned, this formula allows you to estimate how much a company can earn from an average customer throughout the period of their cooperation with the brand.
Why is CLV important?
More importantly, measuring CLV and segmenting customers according to specific characteristics allows you to better tailor the purchase path to their needs, which is key to increasing this value.
CLV measurement and analysis are also essential tools when planning the allocation of marketing resources and introducing changes to the offer or functionalities of an online store (e.g. simplifying the aforementioned shopping path).
CLV is also a key metric in identifying loyal customers – those we care about acquiring the most. Market research in recent years has clearly shown that investing in the satisfaction of existing customers is usually more profitable than acquiring new ones. The cost of acquiring a new customer is much higher than retaining an existing one.
Measuring CLV also allows you to optimize your e-commerce pricing strategy to maximize profits from the most valuable customers.
Knowing the CLV value can also affect inventory management, especially in retail companies – online stores. Knowing which customer groups bring the most profits allows for better demand forecasting and avoiding excess inventory.
CLV can also help optimize and improve post-sales service. This allows the company to focus its efforts on improving the overall experience for customers who generate the most revenue.
Historical CLV and forecasted CLV are two different approaches to measuring customer value. CLV can be calculated based on purchases a customer has already made or based on projected spending.
Historical CLV is based on past data, analyzing customers’ actual purchasing behavior and calculating how much revenue they generated over a given period of time. It’s a useful tool for evaluating past marketing efforts and their impact on customer loyalty.
The predicted CLV, on the other hand, is based on predictive models that take into account various factors, such as previous customer behavior (historical), market trends, or changing consumer preferences. The predicted CLV indicator allows for predicting the future value of the customer, which is crucial when planning long-term marketing strategies and allocating financial resources.
In practice, both measures are complementary: historical CLV provides a solid evidence base, while forecasted CLV helps in making decisions about future investments and actions.
You can increase CLV by improving any of the variables in the equation mentioned earlier: average spend, spend frequency, or relationship length. The methods for increasing customer value can vary greatly by company and industry, however. Here are some general best practices to consider when working to increase CLV.
With the tactics listed above, you will increase your CLV and make your visitors more satisfied with their purchases. The customer lifecycle throughout their life on your website is a key metric that you should pay attention to when planning your marketing campaign. Understanding and correctly calculating CLV helps you make informed business decisions and ultimately improves your company’s long-term profitability.
At the same time, it is necessary to monitor both historical and forecasted CLV values in order to adjust the strategy to changing market conditions in relation to customer preferences. Implementing effective strategies to increase CLV, such as the aforementioned loyalty programs, personalizing offers in the online store or offering a subscription model, can significantly affect the long-term success of the company. Ultimately, CLV is an invaluable tool that allows companies to maximize the value of their customers and achieve real and sustainable growth.
Kasia Cieslik
SEO Specialist