What is Customer Lifetime Value (CLV)?
Posted: Mon Jan 20, 2025 12:14 pm
Customer Lifetime Value , or CLV, is an important key performance indicator (KPI) for evaluating the success of a business or a digital or traditional marketing strategy. By determining it appropriately, you can optimize the Customer Acquisition Cost and focus your investment on finding higher quality customers. Let's see what it is, how it is calculated, what it is used for, and what benefits it brings to Inbound Marketing .
What is Customer Lifetime Value ?
The first thing to be clear about is that there are customers turn leads into sales with overseas chinese in worldwide data who are worth more than others. For example, a regular visitor to a restaurant who eats the most expensive dishes on the menu and is often accompanied by large groups of people is certainly worth more than one who goes from time to time, buys the cheapest and complains about everything. In this sense, CLV can be defined as a metric to estimate the value (profit) that a relationship with a customer represents for a business over a given period of time.
How CLV is calculated
Customer Lifetime Value is calculated taking into account the following elements:
Average Spend : The average amount of money the customer spends on each purchase.
Purchase recurrence: number of times the customer purchases during a given period of time (one month, one year, etc.)
Customer Lifetime: The expected duration of the relationship with that customer.
With these data clear, the following formula is applied:
LTV = AVERAGE SPEND x ACQUISITION RECURRENCE x CUSTOMER LIFE
To represent this formula, we can continue with the example of the restaurant customer. Suppose he visits the business five times a week and generally buys a dish that costs $3, and you want to know his value for a one-year relationship:
LTV = 3 x 5 x 1 = 15
The operation is simple. However, in this case an additional adjustment must be made, since you have the acquisition recurrence in weeks and you need to convert it to a year. To do this, you multiply the result by 48 (the number of weeks in a year). So:
15 x 48 = 720
This means that this client will represent a value of $720 for the year that the relationship is expected to last. However, this figure has a number of variables that can alter it and you must apply it intelligently:
Difficulty in providing the service or selling the product.
Time of interaction before conversion.
Method of payment.
Actual profit from the product or service sold to you.
Customer acquisition cost (most of the time it is difficult to know for sure, and we work with an approximate value obtained by dividing the marketing costs of a specific campaign by the total number of customers acquired through it).
New ways for consumers to shop.
That is why it is sometimes more effective to hire the services of a specialist who can perform the respective calculations and provide concrete figures and intelligent advice.
What is the CLV for?
Its main function is to provide specific data to plan, evaluate and monitor the performance of the following strategies:
Customer Relationship Management (CRM).
Marketing and sales.
Customer acquisition.
The last two points are of vital importance for the success of a business. If the calculation of the costs of these strategies results in them being at or above the CLV, they simply do not work. It is essential to adapt them so that there is a real profit margin and actions are not carried out from which no benefit will be obtained.
Benefits of knowing the CLV
In addition to the benefits that can be deduced from the above points, the following can be noted:
Classify customers.
Knowing the real value of each customer to launch smart loyalty campaigns, increase conversions and second sales of other products and services of the brand.
Analyze elements of interaction.
Review the value proposition of the company's products.
Learning to view the client as an asset and capital investment, which must be cared for and maintained for as long as possible, as well as exploited to the maximum.
Define exactly the maximum investment that can be made in marketing and advertising.
One important thing is that this estimate of profits or losses resulting from the relationship with a client during a certain period of time is much more accurate when it is done with data that is thoroughly known by the company. In other words, the company must work hard on public and commercial relations to obtain accurate information about its clients' behavior, idiosyncrasies, purchasing power and relationship with the brand. Its usefulness for planning and executing content strategies is becoming more relevant every day, given the accelerated development of the digital world and the emergence of analytical tools with excellent functionalities to measure this type of indicators.
What is Customer Lifetime Value ?
The first thing to be clear about is that there are customers turn leads into sales with overseas chinese in worldwide data who are worth more than others. For example, a regular visitor to a restaurant who eats the most expensive dishes on the menu and is often accompanied by large groups of people is certainly worth more than one who goes from time to time, buys the cheapest and complains about everything. In this sense, CLV can be defined as a metric to estimate the value (profit) that a relationship with a customer represents for a business over a given period of time.
How CLV is calculated
Customer Lifetime Value is calculated taking into account the following elements:
Average Spend : The average amount of money the customer spends on each purchase.
Purchase recurrence: number of times the customer purchases during a given period of time (one month, one year, etc.)
Customer Lifetime: The expected duration of the relationship with that customer.
With these data clear, the following formula is applied:
LTV = AVERAGE SPEND x ACQUISITION RECURRENCE x CUSTOMER LIFE
To represent this formula, we can continue with the example of the restaurant customer. Suppose he visits the business five times a week and generally buys a dish that costs $3, and you want to know his value for a one-year relationship:
LTV = 3 x 5 x 1 = 15
The operation is simple. However, in this case an additional adjustment must be made, since you have the acquisition recurrence in weeks and you need to convert it to a year. To do this, you multiply the result by 48 (the number of weeks in a year). So:
15 x 48 = 720
This means that this client will represent a value of $720 for the year that the relationship is expected to last. However, this figure has a number of variables that can alter it and you must apply it intelligently:
Difficulty in providing the service or selling the product.
Time of interaction before conversion.
Method of payment.
Actual profit from the product or service sold to you.
Customer acquisition cost (most of the time it is difficult to know for sure, and we work with an approximate value obtained by dividing the marketing costs of a specific campaign by the total number of customers acquired through it).
New ways for consumers to shop.
That is why it is sometimes more effective to hire the services of a specialist who can perform the respective calculations and provide concrete figures and intelligent advice.
What is the CLV for?
Its main function is to provide specific data to plan, evaluate and monitor the performance of the following strategies:
Customer Relationship Management (CRM).
Marketing and sales.
Customer acquisition.
The last two points are of vital importance for the success of a business. If the calculation of the costs of these strategies results in them being at or above the CLV, they simply do not work. It is essential to adapt them so that there is a real profit margin and actions are not carried out from which no benefit will be obtained.
Benefits of knowing the CLV
In addition to the benefits that can be deduced from the above points, the following can be noted:
Classify customers.
Knowing the real value of each customer to launch smart loyalty campaigns, increase conversions and second sales of other products and services of the brand.
Analyze elements of interaction.
Review the value proposition of the company's products.
Learning to view the client as an asset and capital investment, which must be cared for and maintained for as long as possible, as well as exploited to the maximum.
Define exactly the maximum investment that can be made in marketing and advertising.
One important thing is that this estimate of profits or losses resulting from the relationship with a client during a certain period of time is much more accurate when it is done with data that is thoroughly known by the company. In other words, the company must work hard on public and commercial relations to obtain accurate information about its clients' behavior, idiosyncrasies, purchasing power and relationship with the brand. Its usefulness for planning and executing content strategies is becoming more relevant every day, given the accelerated development of the digital world and the emergence of analytical tools with excellent functionalities to measure this type of indicators.