How do you measure customer lifetime value?

1 Why CLV matters

CLV is not just a number, it is a strategic tool that can help you make better decisions for your business development. Knowing your CLV can help you optimize your marketing budget and channels to focus on the most valuable customers and prospects, as well as increase customer retention and loyalty by offering personalized services, rewards, and incentives. Additionally, it can enhance product development and innovation by identifying the needs and preferences of high-value customers, as well as expand your market share and growth by targeting similar customers in new segments or regions.

2 How to calculate CLV

There are various methods to calculate CLV, depending on the data and assumptions you have. For example, Historical CLV adds up all the revenue that a customer has generated for your business in the past, but doesn't consider future behavior or changes in customer behavior. Predictive CLV utilizes statistical models and algorithms to estimate future revenue, based on past and current behavior, demographics, preferences, and market trends. It is more accurate and dynamic, yet requires more data and analysis. The Simple CLV method uses a basic formula to calculate the average revenue per year multiplied by the average number of years that they stay with your business. While it is a fast way to get a rough estimate of CLV, it does not take into account variations in customer behavior or profitability.

3 How to improve CLV

Calculating your CLV can help you improve your business development by taking actions to increase the value of your existing customers and attract new ones. To do this, you should focus on increasing customer satisfaction and loyalty through excellent customer service, quality products, and value-added features. Additionally, upselling and cross-selling relevant and complementary solutions to customers can be beneficial. You can also reduce customer churn and attrition by identifying and addressing the reasons why customers leave. Furthermore, creating referral programs and word-of-mouth marketing campaigns may encourage customers to recommend your business to their friends and family. Finally, segmenting your customers based on their CLV allows you to tailor your marketing and sales strategies accordingly. For instance, offering more discounts and incentives to low-value customers to increase their spending or investing more resources into high-value customers to retain and reward them.

4 How to benchmark CLV

CLV is not only useful for measuring and improving your own performance, but also for comparing and contrasting your performance with your competitors and industry standards. By benchmarking your CLV, you can identify your competitive advantages and disadvantages in terms of customer value and retention, evaluate your market position and potential in relation to target segments and regions, adjust your pricing and value proposition to match customer expectations and willingness to pay, as well as learn from the best practices and mistakes of other businesses in the same niche or sector.

5 How to communicate CLV

Communicating your CLV (Customer Lifetime Value) is an important step in aligning your team and management on the same goals and vision for your business development. It can also demonstrate your value and credibility to investors and potential partners, as it shows how much revenue and profit you can generate from customers. Educating and engaging your customers with your CLV can show them how much you value their relationship and how much they can benefit from staying with you.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?