The Importance of Customer Lifetime Value for Your Business

Customer lifetime value is just as important to a business as physical assets, customer purchases, and total revenue. CLV is what is used to establish a business. Today, we will go over what CLV is, its value, and how to calculate it.

What Is Customer Lifetime Value?

CLV is the estimated profit a company will earn from a particular customer throughout its relationship with that company. Calculating CLV helps businesses make better decisions and can help them decide how much they should invest in keeping them happy and retaining these repeat customers.

Why Is CLV Important?

Here are a few reasons CLV is so important to a business.

Helps Reduce Costs

When you know your CLV, you can find ways to save money and eliminate any excessive spending you may have been doing to gain new customers. Customer acquisition often proves to be much more expensive than retaining your current customers because your current customers are much more likely to purchase from you again.

Successfully Plan Your Marketing Strategies

Your CLV helps when it comes to developing effective marketing strategies for your business. It tells you how much you should spend on customer loyalty initiatives and aids in creating a good budget.

Allows You to Focus on Valuable Customer Segments

If you take the time to learn more about your customers, you can better evaluate how to retain your repeat customers. You can also learn which segments generate the most profit for your business.

Calculating Your CLV

The formula for calculating your CLV is quite simple. It is your customer value times your average customer lifespan. Multiply the average purchase value by the average purchase frequency rate.

The average purchase value is the total revenue for the year divided by the number of purchases made within that year. The frequency rate is the number of purchases made over one period divided by the number of customers you had within that same timeframe.

Once you have these figures, you can calculate your CLV. Over time, you can use your CLV to find new ways to retain your current customers, which is vital to growing your business.