Customer Lifetime Value (CLV)
What is Customer Lifetime Value (CLV)?
The term Customer Lifetime Value, which has its acronym in CLV, can be translated as “Customer Lifetime Value”, and is the cost of two metrics in the field of marketing: the current value of the customer and the potential value that a customer may have for a company.
In other words, the Customer Lifetime Value is used to measure the profit margin that a customer will bring us during the entire time they have a relationship with the company; therefore, it is essential to know our customer as well as their behavior and needs.
Therefore, as it is logical to think, the objective of a marketing strategy based on CLV is to achieve the longest lasting relationship with the customer, since in general terms it is more beneficial to retain existing customers than to attract new ones.
1. Calculating CLV
There are different methods for calculating CLV, the three most commonly used are simple CLV, real CLV and traditional CLV. Whichever one you use, it is one of the most important KPIs in any digital marketing plan and you should always keep it in mind to assess the viability of your business.
– Simple CLV. As its name suggests, it is the simplest of all and to calculate it we need the following data: average annual expenditure per customer (for example, the average expenditure per visit and multiplying the average purchase by the frequency of purchase) and the average life of the customer in your company (measured in time).
The formula for calculating the simple CLV is as follows:
CLV simple = gasto anual (n.º de visitas * gasto medio) * vida media
– Real CLV. This is perhaps the most commonly used CLV, since it takes into account the costs of offering the product or service for the company. In other words, the profit margin.
To calculate it, it is necessary to know: average life of the customer, average purchase value and purchase frequency (thus obtaining the customer’s average annual expenditure). In addition, it is necessary to know the profit margin (obtained by subtracting the price of producing the product from the selling price).
The formula you can use to obtain the real CLV would be:
CLV real = CLV simple * margen de beneficios (gasto de producción – precio de compra)
– Traditional CLV. In this case, in addition to knowing the simple CLV, the following data will be necessary: gross margin of the customer’s average lifetime, customer retention rate and the discount rate (cash flow).
In this case, the formula would be:
CLV tradicional = margen bruto * (tasa de retención / 1 + flujo del dinero – tasa de retención)
2. Is it important to calculate Customer Lifetime Value?
Without a doubt, knowing and calculating the Customer Lifetime Value is something vital and essential for several reasons, such as:
- Understanding the real value of each customer optimizes marketing and email marketing campaigns, improving conversions and new sales to the same customer.
- It helps to have an estimate of the investment you will need for creating a profitable marketing strategy.
- With this you can review and optimize the value proposition of the products/services you offer.
- It is vital to know and retain customers, increasing the value of your existing customers, so that the company will keep growing.
- It facilitates to know the reasons that lead your customers to buy your products/services and why they are loyal to the brand.
- It provides long-term estimates that will help the company itself and can increase ROI.
- It allows you to create business strategies to attract new customers and retain existing ones, while maintaining profit margins.