What Is Customer Lifetime Value In Marketing? – Explained

Customer lifetime value (also known as CLV) is a critical metric in marketing that measures the total worth of a customer to a business over the entire duration of their relationship.

Understanding and optimizing CLV allows companies to make data-driven decisions that boost customer loyalty, marketing ROI, and long-term profitability. 

In this article, we’ll dive deep into what customer lifetime value is, why it matters, and how to calculate and leverage it in your marketing efforts.

What is Customer Lifetime Value?

At its core, customer lifetime value predicts the total net profit a business can expect from an individual customer account. 

It looks beyond just the initial purchase to consider the customer’s value over the lifetime of their relationship with the company.

CLV is an important metric because acquiring new customers can cost 5-25X more than retaining existing ones. 

By identifying and nurturing high-value customers, companies can significantly boost revenue and lower churn.

CLV takes into account several key factors:

• Purchase frequency: How often the customer buys
• Average purchase value: How much the customer typically spends per order
• Customer lifespan: How long the customer continues purchasing before churning

For example, let’s say Jim spends an average of $50 per order, orders twice per month, and remains a customer for 3 years.

Jim’s CLV would be: $50 (avg. purchase value) x 2 (purchase frequency) x 36 months (lifespan) = $3,600

Companies with high CLV focus on building long-term customer relationships vs. optimizing for single transactions.

How to Calculate Customer Lifetime Value

Calculating CLV involves collecting and analyzing customer data to determine average purchase value, frequency, and lifespan. Here’s a simple formula:

For a more detailed approach:

1. Calculate average purchase value: Sum of total revenue over a period / Number of purchases
2. Calculate purchase frequency: Number of purchases / Number of unique customers
3. Determine customer lifespan: Average number of years a customer remains active
4. Calculate CLV: Multiply average purchase value, purchase frequency, and customer lifespan

For example:

• Average purchase value: $100
• Purchase frequency: 5 purchases per year
• Customer lifespan: 3 years

Note that calculating CLV should be an ongoing process, not a one-off task, as customer behavior and data change over time.

Benefits of Measuring Customer Lifetime Value

Understanding CLV empowers companies to:

1. Segment customers into low, medium and high CLV buckets to tailor marketing
2. Optimize marketing spend on high-potential customers to get maximum ROI
3. Improve retention by identifying and nurturing profitable customers
4. Personalize customer experiences based on a customer’s CLV and preferences
5. Reduce churn by proactively engaging at-risk high-value customers
6. Increase loyalty with targeted rewards for top customers

For example, Starbucks uses purchase data to segment customers and send personalized offers that incentivize the behaviors of their most profitable customer groups.

Challenges with CLV

While immensely valuable, measuring CLV has some challenges:

• Data collection: CLV requires a complete, accurate record of all customer purchases and interactions across channels. Many companies struggle to unify siloed customer data.
• Evolving customer preferences: Customers’ needs and behaviors change over time, so CLV predictions must be continually updated based on real-time data. Businesses need agile data management systems.
• Defining lifespan: With so many factors affecting lifespan, it can be difficult to accurately predict when a customer relationship will end. Companies should factor in churn and dormant customers.
• Resource allocation: Measuring CLV can reveal a small group of customers provides the bulk of revenue. But focusing too narrowly on this group puts revenue at risk. The goal is maximizing total CLV across all segments.

Conclusion

Understanding and optimizing customer lifetime value is critical to modern data-driven marketing. 

Marketers can extract more value from the customers with the most potential by measuring CLV, segmenting customers by profitability, and tailoring experiences across the customer journey. 

While not without challenges, calculating CLV provides an essential foundation for long-term, sustainable business growth. 

The key is consistently tracking and acting on evolving customer data to proactively engage and delight your most valuable customers.