Did you know that you can easily calculate the value a customer brings to your business? The so-called Customer Lifetime Value (abbreviation: CLV; also known as customer value) is an important metric in business administration that can be used to determine the profitability of an individual customer relationship.
Term: What is the Customer Lifetime Value (CLV)?
Customer Lifetime Value, or CLV for short, includes All transactions that, on average, each consumer generates for a company during the course of a business relationship.
Each individual customer has a specific value to your business. This value is made up of all the revenue and expenses that customers generate for your business throughout the entire customer relationship—known as the customer lifetime cycle (CLC).
These transactions may also take place in the future and include expenditures for Customer Acquisition, marketing activities and services, as well as, in theory, returns and refunds resulting from exchanges or warranty or guarantee claims. The use of services can also be included—so it’s not just about the monetary value of products sold.
Why is the Customer Lifetime Value (CLV) important for your company?
Now you're probably wondering why you should calculate CLV—or Customer Lifetime Value—in the first place, and how your business can benefit from it.
CLV as a planning tool
Customer value is calculated to determine marketing activities as well as the required Budget to be able to plan strategically. This means that all necessary marketing measures are tailored individually to each customer or. Customer Segments can be tailored.
The higher the calculated value, the more significant that individual customer is to a business, and the more of the budget can be allocated to those customer relationships with confidence.
Using customer lifetime value, all available Marketing Resources for the Customer Relationship Management (Customer Relationship Management) can be effectively allocated and utilized. It serves as the foundation for determining the available budget for marketing, sales, and production and for using that budget efficiently throughout the customer lifecycle.
CLV Formula: How to calculate the Customer Lifetime Value or customer value
There are two ways to calculate customer lifetime value:
- In the simple version The customer's total purchases over the course of the customer relationship are added up, and the service fees are deducted from that total.
- The somewhat more complex calculation It also includes predictions about the customer's future purchases. In addition, the customer's expenses and the discounting of capital must be factored in.
The formula for this (Variant 2) is as follows:
Meaning of the Individual Components of the CLV Calculation
- T = Expected duration of the business relationship
- t = Time interval (t = 0, 1, 2, … n)
- et = expected revenue from the customer during time period t
- at = Expected expenses for customer care, service, etc.
- i = Discount factor assumed for the estimated duration of the business relationship
Criticism in the calculation of the CLV
As can be seen from the second calculation, determining the CLV involves a great deal of Uncertainty Due to the Prediction Factor. Both estimating the expected duration of a customer relationship and accurately calculating customer-related expenses are difficult to predict. In practice, therefore, empirical values or industry benchmarks are usually used.
Nevertheless, calculating the value of individual or multiple customer relationships is important for every company, even if there is a certain degree of uncertainty involved. The more empirical data available, the more accurate the result.
How can you effectively measure Customer Lifetime Value (CLV)? have a positive impact on?
Once the CLV has been calculated, the question arises as to how it can be improved. There are also a variety of ways to increase customer value. As the customer lifetime value formula makes clear, the following metrics are particularly important: influencing factors of the result:
- Cost of customer service
- Average order value
- Duration of the business relationship
- Frequency of Purchases
Areas for Improvement based on Key Performance Indicators
This points to opportunities for improvement at precisely these levels. It is advisable to first analyze the various areas of the company and identify its strengths and weaknesses in order to be able to work with them.
The fact is: Acquiring a new customer can take up to 10 times more expensive than retaining a regular customer.
For this reason, it is extremely important to New Customer Acquisition to make them efficient and to constantly keep track of the existing processes. And, when necessary, to continuously adapt them to changing conditions and optimize them. In the long run, this will have a positive impact on your sales.
Keyword: Customer Service
Are you perhaps allocating too few resources to the Customer service, your Complaint Management and Customer Loyalty? To increase customer value, it certainly makes sense to invest in Customer Retention Initiatives to invest, thereby reducing the duration of the Customer Relationship to increase. For example, by presenting yourself professionally and offering friendly advice, your customer will feel especially well taken care of.
Stay top of mind with your customers. By Email Marketing or Push Notifications Stay in constant contact with your clients so that you’ll be considered again as a point of contact the next time the opportunity arises. This opportunity is especially available to you during times of crisis.
Upsells and special offers for selected customers
Offer your customers complementary products (so-called Up-Sells or Cross-Sells) that complement your main product. Show that you are knowledgeable and well-positioned in your field.
Position Special Offers for your loyal customers, to reward them for their loyalty. Rewards make people happy, so it's important to, Reward Systems to be used.
All of this means that, by spending more efficiently on customer care and improving service, you’ll ultimately have more satisfied customers. These customers will feel a stronger connection to the company, remain in the business relationship longer, and place greater trust in it.
Strengthen customer loyalty, reduce willingness to switch
This reduces customers' likelihood of switching, increases purchase frequency and revenue, and turns customers into brand ambassadors who, in turn, attract new customers for you time and time again. All in all, this helps you achieve a Increasing Customer Value and Customer Lifetime Values – So, well-considered investments!
Numerous Advantages by calculating CLV
Customer Lifetime Value (CLV) helps to, determining the value of your customers and, as a result, to specifically improve your customer acquisition and customer retention. Consequently, this means positive impact on your sales.
This way, you can focus on the most promising segment of your customer base (the so-called A-tier customers among your existing customers) and highlight them through appropriate marketing and sales campaigns, while providing them with personalized support.
FAQ: Frequently Asked Questions About Customer Lifetime Value
What is the Customer Lifetime Value (CLV)?
Customer Lifetime Value encompasses all transactions that a company generates on average per customer over the course of a business relationship. It consists of all revenue and expenses generated by customers throughout the entire customer relationship—the Customer Lifetime Cycle (CLC).
How do you calculate customer lifetime value?
There are two approaches. In the simpler approach, the total value of past purchases is calculated over the duration of the customer relationship, and customer service costs are subtracted from that total. The more complex approach also takes into account forecasts of future purchases, the customer’s spending, and the discounting of capital.
What factors influence CLV?
Four key factors in particular: customer service costs, average cart value, the duration of the customer relationship, and purchase frequency. Measures to increase customer value focus precisely on these areas.
Is customer retention more cost-effective than acquiring new customers?
Yes. Acquiring a new customer can cost up to 10 times as much as retaining a regular customer. That's why it's worth investing in Customer Retention Initiatives to invest.
How reliable is the calculated CLV?
The calculation involves some uncertainty due to the forecasting factor: Both the expected duration of a customer relationship and the exact customer-specific expenditures are difficult to predict. In practice, therefore, empirical data or industry benchmarks are used—and the more empirical data available, the more accurate the result.
