What is Customer Lifetime Value (CLV)?

Customer Lifetime Value (CLV)

Customer lifetime value refers to the total amount of money a customer is likely to spend on products or services from the company through his lifespan. Businesses require CLV to develop strategies regarding their investments. If, for example, a company has a high CLV, it should better consider investing in acquiring new customers.

For example, a CLV of an iPhone owner can be 35000$ if he is satisfied with the product and will continue buying newer models in the future. In this case, it is good to try maintaining relationships with this customer due to the potential profit he can bring to the company. On the other hand, if the client’s CLV is 500$ it won’t be profitable to maintain relationships with him.

Formula of CLV

CLV is calculated by multiplying the average value of purchase with the number of times the customer will buy each year and an average length of the customer relationship (in years).

Value of CLV

CLV plays an important role for companies in terms of decision making:

Using CLV, companies can find out which products have the highest profitability.
Comparing CLVs of different clients, a company can determine the most profitable among them.
When you know how much you spend on a client with a certain CLV, you can predict how much it will cost a company to acquire a similar customer and if it will be profitable.

Ways to improve customer’s CLV

It is much easier to sell products to the existing customer, with whom the business already has sustainable relationships, than looking for a new customer. That’s why it is a good practice to use different techniques to maintain good customer relationships. Here are some of them:

Reward system. Customers will gladly repeat their purchases if they can get something in exchange.
Cross-selling. This simple but effective technique can increase an average customer’s CLV by simply offering something relevant for his existing purchase. For example, if a customer buys a laptop he can also consider buying a bag for it, so why not offering him one?
Easy return policy. If customers can easily ask to replace their products or want to make a return hassle-free they will be glad to cooperate with such business again.

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