How do you measure customer lifetime value (CLV) and why is it important for relationship marketing?

2 Why is CLV important for relationship marketing?

CLV is important for relationship marketing because it helps you identify and segment your most valuable customers, those who are loyal, repeat buyers, and advocates for your brand. By knowing your CLV, you can tailor your marketing efforts to deliver more value and satisfaction to these customers, increasing their loyalty and referrals. You can also use CLV to allocate your marketing resources more efficiently, focusing on the channels and campaigns that generate the highest return on investment.

3 How to measure CLV?

There are different methods and formulas to measure CLV, depending on the type and complexity of your business model. However, a simple and common way to calculate CLV is to use the following formula:

CLV = (Average Order Value x Purchase Frequency x Average Customer Lifespan) - Customer Acquisition Cost

Average Order Value (AOV) is the amount of money that a customer spends on each purchase. Purchase Frequency (PF) is the number of times that a customer buys from you in a given period. Average Customer Lifespan (ACL) is the length of time that a customer stays with you before they stop buying. Customer Acquisition Cost (CAC) is the amount of money that you spend on attracting and converting a new customer.

For example, if your AOV is $50, your PF is 4 times per year, your ACL is 3 years, and your CAC is $100, then your CLV is:

CLV = ($50 x 4 x 3) - $100

CLV = $500

This means that each customer brings you $500 in profit over their lifetime.

4 How to increase CLV?

Increasing Customer Lifetime Value (CLV) can be achieved through two main strategies: increasing revenue per customer and increasing retention rate. To increase the Average Order Value (AOV), you can offer cross-selling and upselling opportunities such as discounts, free shipping, or bundles. To increase the Purchase Frequency (PF), you can create loyalty programs and offer rewards or incentives, send personalized emails, or request feedback. Providing excellent customer service and support will help to increase the Average Customer Lifetime (ACL), such as responding quickly to inquiries or complaints, offering guarantees or warranties, providing helpful tips or tutorials, or creating a community or forum. Optimizing marketing channels and campaigns is also important for reducing the Customer Acquisition Cost (CAC) by using data and analytics to target customers, testing and improving landing pages and calls to action, or leveraging word-of-mouth and social proof.