Customer Lifetime Value (CLV): Definition, formula, calculation & measures to increase
Did you know that you can easily calculate the value that a customer has for your company? The so-called customer lifetime value (abbreviation: CLV; also known as customer value) is an important key figure in business management that can be used to determine the profitability of an individual customer relationship.
Definition: What is Customer Lifetime Value (CLV)?
Customer Lifetime Value, or CLV for short, comprises all transactions that arise for a company on average per consumer during a business relationship.
Each individual customer has a certain value for your company. This value is made up of all income and expenses that customers generate for your company during the entire customer relationship, the so-called Customer Lifetime Cycle (CLC).
These transactions can also take place in the future and include expenses for customer acquisition, marketing activities and services as well as theoretically returns and refunds due to exchanges or guarantee or warranty claims. The use of services can also be included - so it is not just about the monetary value of products sold.
Why is Customer Lifetime Value (CLV) important for your company?
Now you are probably asking yourself why you should calculate the CLV or Customer Lifetime Value at all and what benefits you can derive from it for your company?
CLV as a planning tool
Customer lifetime value is determined in order to plan marketing activities and the required budget in a targeted manner. This means that all necessary marketing measures can be individually tailored to the respective customers or customer segments.
The higher the calculated value, the more important the individual customer is for a business and the more budget can be used for the respective customer relationships with a clear conscience.
With the help of the customer lifetime value, all available marketing resources for customer relationship management can be effectively distributed and used. It forms the basis for determining the available budget for marketing, sales and production and for using it efficiently with regard to customer lifetime value.
CLV formula: How to calculate the customer lifetime value or customer value
There are two ways to calculate the customer lifetime value:
In the simple variant, the purchases made by the customer over the duration of the customer relationship are added together and the support costs are deducted from this.
The somewhat more complex calculation also includes predictions about the customer's future purchases. Furthermore, the expenses for the customer and a discounting of the capital must be taken into account.
The formula for this (variant 2) is as follows:
(Source: https://www.gedys-intraware.de/customer-lifetime-value/)
Meaning of the individual components of the CLV calculation:
T = expected duration of the business relationship
t = time period (t = 0, 1, 2,....n)
et = expected income from the customer in time span t
at = expected expenses for customer care, service, etc.
i = discount factor assumed for the estimated length of the business relationship
Criticism of the calculation of the CLV
As can be seen from the second calculation, determining the CLV involves a high degree of uncertainty due to the forecasting factor. Both the estimation of the expected duration of a customer relationship and an exact calculation of customer-related expenditure are difficult to forecast. 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. The more empirical values available, the more accurate the result.
How can the customer lifetime value (CLV) be positively influenced in a targeted manner?
Once the CLV has been calculated, the question arises as to how it can be improved. There are also a number of ways to achieve an increase in customer value. As can be seen from the customer lifetime value formula, the following key figures are the main factors influencing the result:
Customer service costs
Average shopping basket value
Duration of the business relationship
Frequency of purchases
Potential for improvement based on KPIs (Key Performance Indicators)
This results in potential for improvement at precisely these levels. It is advisable to first analyze the various areas in the company and to know its strengths and weaknesses in order to be able to work with them.
The fact is that acquiring a new customer is up to 10 times more expensive than retaining a regular customer.
For this reason, it is extremely important to organize the acquisition of new customers efficiently and to keep a constant overview of the processes in place. And, if necessary, constantly adapt and optimize them to changing conditions. In the long term, this will have a positive effect on your sales.
Keyword: Customer service
Are you possibly putting too few resources into customer service, complaint management and customer loyalty? In order to increase customer value, it makes sense to invest in customer loyalty measures to increase the duration of the customer relationship. For example, a competent manner and friendly advice will make your customer feel particularly well looked after.
Stay in the minds of your customers. Through email marketing or push notifications, you can stay in constant contact with your customers so that they will consider you as a contact point again when the next opportunity arises. This option is particularly useful in times of crisis.
Upsells and special offers for selected customers
Offer your customers complementary products (so-called up-sells or cross-sells) that match your main product. Show that you are competent and well-positioned in your field.
Provide special offers for your loyal customers to reward them for their loyalty. Rewards make people happy, so it's important to use reward systems.
By spending more efficiently on customer care and improving service, you'll end up with happier customers. These customers will feel more loyal to the company, stay longer in the business relationship and also place more trust in it.
Strengthen customer loyalty, reduce willingness to switch
This reduces customers' willingness to switch, increases purchase frequency and revenue and turns customers into brand ambassadors, who in turn attract new customers for you again and again. All in all, you will achieve an increase in customer value and customer lifetime value - a well-considered investment!
Numerous advantages by using CLV calculations
The Customer Lifetime Value (CLV) helps to determine the value of your customers and consequently to improve your customer acquisition and customer care in a targeted manner. As a result, this has a positive impact on your sales.
This allows you to focus on the most promising part of your customer base (the so-called A-customers of your existing customers) and bring them to the fore with suitable marketing and sales campaigns and provide them with individual support.
