CLV, or Customer Lifetime Value, represents the total net profit a company can expect to earn from a customer over the entire duration of their relationship.
CLV is an important measure for businesses as it helps them understand the long-term value of each customer and make informed decisions about customer acquisition, retention, and marketing spend.
How do you calculate CLV?
A simple way to calculate the CLV could be to use numbers for the average revenue per customer, the average customer lifespan, and the company’s profit margin.
CLV = (Average Revenue per Customer x Average Customer Lifespan) x Profit Margin
For example, if a customer spends an average of $500 per year, stays with the company for an average of 5 years, and the company has a profit margin of 20%, the CLV would be:
CLV = ($500 x 5) x 0.20 = $500
Understanding the CLV allows businesses to allocate marketing budget more effectively by focusing on customer segments with higher CLV, evaluate customer acquisition strategies and adjust them based on the cost of acquiring new customers compared to their expected CLV, and prioritize customer retention efforts (retaining high-CLV customers can have a significant impact on a company’s profitability).