CLV – What is it and why is it key to your business

In the current digital age, increasing customer experiences has become one of the main goals for business growth. Therefore, some businesses tend to spend more on improving customer experiences and matching customer expectations. Even though this might look beneficial for short-term business growth, it will hurt the business on the long-term. The main reason for the same is that the business failed to realize the value of a customer and overspent on him/her. This is where CLV (Customer Lifetime Value) plays a part.

Definition:

CLV denotes the amount of money that he/she would spend during his lifetime as a customer for your business. In short, CLV is a forecast that could help businesses determine the value of a customer relationship. With the help of CLV, businesses can accurately determine their marketing spends and reduce overspending. Thus, it becomes a critical metric to business growth and customer satisfaction. However, only 42% of businesses are able to measure customer lifetime value (CLV) as most think it is a complicated metric to calculate.

Calculation:

In the simplest terms, businesses can measure their CLV by subtracting their business revenue with the cost to acquire and serve a customer. This would give the current CLV of the business. To predict your business’ CLV, you need to

• Identify points of interaction (POI) where customers create value.

• Create a comprehensive customer journey by seamlessly integrating the POIs.

• Calculate revenue generated at each POI.

• Sum up all the revenue to get the lifetime revenue of the customer.

• Subtract the cost spent on attracting/serving (marketing & customer service) the customer to get the CLV.

An important thing to note is that each customer can have different CLVs, and hence it is better to calculate CLVs for each customer to get accurate results. However, businesses that do not use CLVs can also gain huge benefits by calculating a blended CLV for all its customers. The main goal is to ensure that the CLV is high.

Importance:

Most businesses that calculate CLV can evaluate customers better and make smarter customer service/marketing investments. An important insight that businesses can learn is that customer retention is much cheaper in comparison to customer acquisition. Businesses can quantify this notion with the help of CLV as they will learn where they are spending their budget. CLV can also help businesses spend their marketing budget efficiently because they would understand whether to invest more in customer acquisition and customer retention. Since CLV looks at the business’ customer value over a long-term, it can also accurately determine the business’ growth prospects. This way, the business will be able to invest on sustainable growth and increase their long-term revenue.

Benefits:

As mentioned earlier, CLV is an important metric that will help businesses serve customers efficiently and increase their profit margins. The main goal behind calculating CLV is improving the business’ bottom line. Since CLV is a forecast metric, businesses can be proactive with their sales & marketing activities rather than being reactive. There are several specific advantages in calculating and using CLV. Some of them are as follows

• One of the main advantages of CLV is that it can accurately estimate the effect of a business’ marketing activities.

• Since it can predict a customer’s value and his future spends, it will allow the business to minimize marketing spends and avoid overspending.

• In short, CLV enables businesses to make better marketing decisions as they can spend less time and money on acquiring/retaining customers with lower value.

• With CLV, the customer support team can effectively manage customer relations and focus more on customers with higher value.

• Since the business would make better marketing and customer relation decisions, it can efficiently increase the profit margins of the business.

Through this article, we have explained the purpose of CLV and touched upon the methods to calculate the same. We have also looked the importance of the metric and the benefits of perusing CLV as a critical metric for business growth. In conclusion, we would like to add that CLV is not a magic metric that can improve the business instantly. Businesses should not choose an unrealistic CLV number or neglect the fact that CLVs will change over time. These are some of the common mistakes that businesses can make while depending on CLV. Therefore, businesses should use it efficiently so that it can help businesses perform better and increase their marketing impact.