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What Customer Lifetime Value (CLV) Is & How to Calculate It

What Customer Lifetime Value (CLV) Is & How to Calculate It

Customer Lifetime Value (CLV) is a way of measuring the value of a customer to a company. It is the total profit a company expects to receive in return for all future interactions with customers. It is calculated by taking the lifetime value of a customer, multiplying it by the probability of retention, and then subtracting the acquisition cost.

Before we dive into how to calculate CLV, let's talk about what CLV is. Customer Lifetime Value is the amount you can expect to get paid over the life of a customer based on how much you spent acquiring that customer and how much that customer spends with your business. 

So how do you figure out how much your average customer is worth? Let's dig in and explore how to calculate Customer Lifetime Value.

So, what does this mean? It means that if you can generate more revenue from one customer than the number of customers you acquire in the future, you will be able to generate more money over your customers' lifetime.

It's the key to understanding the actual value of customers.

What is Customer Lifetime Value?

What Is Customer Lifetime Value

A company's primary goal is to grow its business. This means increasing the number of customers. To do so, you must have effective ways to keep your existing customers and attract new ones.

Lifetime value gives you an idea of the value of your customers, or in other words, how much they cost you over time. If you can get a client to pay a higher price or generate more sales, you can increase your profit per customer.

By calculating customer lifetime value, you can gain insight into your current profit margins and what your competitors charge.

What Does CLV Look Like?

You can calculate your CLV using your existing customers and their average order sizes. Here's an example of how you would calculate it:

Number of active customers = 20

Average order size = $300

Total amount paid = $10,000

Average profit margin = 25%

CLV = Total amount paid x Average order size ÷ Total number of active customers

In this case, the resulting calculation would be:

CLV = $10,000 x 300 ÷ 20 = $15,000

Keep in mind that this is an approximation. You may find that your business generates significantly different numbers. For example, if your average customer spends less or makes more purchases in a year, your CLV will look lower than if they spend more.

It's also important to remember that if you have a high churn rate, your CLV will be lower than if you have a low churn rate.

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CLV Is More Important for Smaller Companies

As your business grows, you'll be able to hire additional employees, which could mean more work and opportunities to sell more products. If your business is smaller, this growth may not be as easy or impossible to achieve.

In these cases, you'll have to rely on other strategies, such as attracting more customers.

This is where the concept of customer lifetime value comes in. When calculating the value of your customers, you have to consider their time with your company rather than just their purchase history.

How Can I Increase My CLV?

It's important to understand that CLV is an ongoing challenge for any business. The more time your customer spends with you, the more valuable they become. Your customers will look for alternatives if you don't offer quality service.

So what can you do to keep your customers?

First, it's vital to ensure your customer support team is trained and prepared for the questions that may arise with your products and services.

It would help if you also tried to understand your client's needs and desires, so you can develop personalised solutions that meet their requirements.

As a small business owner, you may be surprised that you can keep more current customers by improving their overall experience with your business.

Try to make your business a pleasant place to spend time and a pleasant experience for your customers.

Customers are likelier to stick around with a business that makes them feel valued, appreciated, and comfortable. Treating your customers well makes them more likely to recommend you to friends and family.

What does a CLV tell us about a customer?

How To Calculate Clv

The CLV is an integral part of any marketing plan. It helps you know whether you are meeting the needs of customers or whether you are losing them.

When you measure the value of a customer, you are looking at the lifetime value of the relationship, which includes the lifetime value of the product and the lifetime value of the relationship.

Measuring CLV can be tricky because it requires a lot of complex data to calculate. We must track how much customers spend on the product, their lifetime costs, and the product returns. This requires a lot of tracking and tracking and more tracking.

With all that complex data, we create a report showing what we calculated as CLV. If the results show that we are losing money on a customer, you know you need to put resources into fixing this situation.

CLV can be helpful for several reasons. First, it allows you to identify customers who are valuable, high performers, and low performers. These customers are the ones who will bring you more profit. By identifying these high performers, you can take more time to build relationships and create stronger bonds with them.

Second, CLV is the best way to compare your product with your competitors. Once you identify your high-performance customers, you can use their values to help you determine what products and services your competitors offer that are most similar to yours.

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Finally, CLV can be an excellent tool for your personal growth. When you see a customer's value to your business, you'll become more motivated to keep that customer.

As you work to grow your business and build relationships with customers, remember to measure the CLV.

Why do some customers seem to be more loyal than others?

Loyalty is the most powerful weapon in your marketing arsenal. It's the cornerstone of successful marketing and the foundation of any profitable business.

Loyal customers are the ones who come back time and time again for more. They are the ones who buy a product or service when it's priced competitively. And they're the ones who tell their friends and colleagues about you, which creates a snowball effect and builds your brand.

So, why are some customers more loyal than others?

The answer is simple: you created loyalty. When you create an experience that is more than just the product or service, you create a customer relationship.

As you continue to serve your customers, you are building a relationship. In a relationship, something is exchanged between the two parties. A relationship is always a two-way street. You must give something in return for the relationship.

If you create a memorable experience, you'll encourage your customers to come back repeatedly. They'll enjoy the experience and want to tell their friends about it.

It would be best to remember that loyalty is a choice, not an obligation. You can create an experience that makes customers feel appreciated and valued and, as a result, become loyal.

What are the different types of CLV?

CLV is calculated using different methods, but all of them involve some form of lifetime value calculation. There are three main types of lifetime value calculations, including the following:

The Average Lifetime Value Method (ALV)

The ALV method uses the average customer lifetime value to determine the value of a single customer. In this case, the average customer lifetime value is the CLV.

This method helps predict the value of a customer. However, the results are not always accurate because the sample size is limited. This is because the sample size is based on the number of customers, and the number of customers is smaller than the number of customers calculated.

The Net Present Value (NPV) Method

The NPV method determines a customer's lifetime value's net present value. This is the value of a single customer minus the cost of acquiring the customer.

This method allows companies to identify high-value customers that they can acquire. It is a common technique for retailers because they can offer customers free products and discounts to acquire them.

The Discounted Cash Flow Method (DCF)

The DCF method calculates the cash flow of a single customer over the customer's life. In this case, the company calculates the present value of the customer's future cash flow.

The company then discounts that value to account for the time it takes to get money from the customer. This is done by calculating the interest rate that would apply to that future value and then discounting it back to the current period.

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The company's total earnings over the customer's lifetime are the sum of the discounted future cash flow.

The company would subtract the acquisition cost from the cash flow to calculate the CLV.

Best CLV Metrics for Different Industries

Different industries have different goals when calculating their CLV metrics. Some companies use CLV to identify their existing customers are the most profitable. In contrast, others use it to determine which potential customers are the most valuable.

There are two main reasons why companies use CLV metrics: to improve profitability and to increase sales. When a company looks to improve profitability, it's often looking for ways to increase its margins. If a company can get more money out of each customer, then it will be able to make more money overall.

When looking to increase sales, CLV can provide insight into which customers are more valuable, which can help drive more sales. It's common for companies to target potential customers based on demographics, product preferences, and more.

A CLV calculator is an essential tool for evaluating your business performance. If your company is trying to figure out how much each customer is worth, then a CLV calculator is the right tool for the job.

If you want to calculate your CLV, many different types are available. Choose one that works best for your needs, but remember that different tools will produce different results.

You may find that your company is using an older version of a CLV calculator that is no longer suitable for your needs. If you need to find a new one, the best way is to check online. Find companies with a similar business model to yours and see what they use for their CLV. You may be surprised to find a more suitable version of a CLV calculator on a competitor's website!

Wrapping Up

CLV is a great way to measure the value of your current and future customers. Once you know what you're worth in terms of customer lifetime value, you can figure out how much to charge per sale.

The main problem with CLV is that it takes time to calculate. But it doesn't have to be a painful process.

We created a spreadsheet that does all the calculations for you, so you can start measuring your value immediately.

To ensure you're getting the most accurate results, we've included an analysis of every conversion to see which conversions are most valuable.

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Stuart Crawford

Stuart Crawford is an award-winning creative director and brand strategist with over 15 years of experience building memorable and influential brands. As Creative Director at Inkbot Design, a leading branding agency, Stuart oversees all creative projects and ensures each client receives a customised brand strategy and visual identity.

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