If for you, the Customer Lifetime Value (CLV) is just a jargonous expression that you come across from time to time in your English reading, it’s time to remedy this shortcoming, and for good reason: the CLV is an interesting, fun and relevant indicator (with a few conditions) to help you :
Predict the total value of your company’s average customer;
Determine how much you can invest in new customer acquisition to stay profitable;
Evaluate and refine your retention strategy;
Deploy full visibility into your customers’ value (when combined with other metrics we’ll see later).
In this practical guide, LeadIn reviews everything there is to know about Customer Lifetime Value (CLV): its meaning, how to calculate it (with examples), its interest, its limitations, etc. Let’s go !
What is Customer Lifetime Value?
Simply put, Customer Lifetime Value (CLV) is a metric that measures the value of an account over the life of a customer with your company. In other words, it is the sum of the cash received from a particular customer before they decide to leave you, minus the cost of acquiring and retaining that customer such as discounts, advertising, gifts, etc.
But why is this so important? Simply because CLV allows you to know how much you can invest in acquiring new customers without losing sight of your profitability. If you spend €100 to acquire a new customer and his CLV is €70, you will have lost €30, because the acquisition cost is higher than the revenue generated by the customer over his lifetime.
The CLV can also be understood in a forward-looking mindset. If you estimate that a prospect will be able to spend $400 with you if they become an actual customer, you can spend more than $100 to acquire them, if necessary.
What is the purpose of Customer Lifetime Value (CLV)?
As you can imagine, the CLV calculation is not an end in itself. Don’t make it a Vanity Metric that is calculated simply to fill out a PPT presentation, illustrate a report or give yourself a look. When it is calculated according to the rules of the art and when it is complemented by other relevant KPIs, the CLV can help you rationalize certain decisions, particularly in terms of your acquisition and retention strategy… a major element when you know that acquisition and retention are the vectors of company growth!
The calculation of the forecasted CLV on buyer personas allows you to refine the budget of your customer acquisition campaigns. In short, you have a ceiling that you can’t exceed when picking up a prospect;
Calculating the effective CLV tells you the average cost of acquiring (and retaining) your customers. It is an excellent indicator of competitiveness, when complemented by other KPIs such as average basket, retention rate, etc.
CLV: these must-know figures
Before detailing the method for calculating Customer Lifetime Value, here are four key statistics that show the interest and stakes of this indicator:
According to a study conducted by Invesp, the average customer CLV is 122% higher than their cost of acquisition. Roughly speaking, companies make a profit of €122 for every €100 invested in acquiring new customers(source);
Another study conducted by Bain & Company found that companies that successfully increase their retention rate by 5% see their profits rise by between 25 and 95 points(source) ;
According to a study conducted by the Harvard Business Review (HBR), companies that have successfully increased their retention rates have seen an average 20% increase in revenue(source) ;
According to a study conducted by Adobe, loyal customers spend an average of 67% more than “casual” customers(source).
Attention: these statistics are averages, which may vary according to the sector of activity, the size of the company (fixed costs), the type of products or services sold, the business model, the economic situation, etc. So it’s important to keep these things in mind when using these statistics to benchmark your CLV.
How to calculate the Customer Lifetime Value? (with example)
It’s simple… in theory! Simply take the average amount your customer spends with you per year, multiply it by the number of years they will remain loyal to your company, and subtract the costs associated with their loyalty (discounts, gifts, retargeting, etc.). You then obtain the value of your customer’s CLV, i.e. the profit you generate with this specific account, or the average profit you generate with all your customers, or the projected profit with prospects likely to become actual customers.
To calculate the CLV, you will therefore need the following:
The retention rate of your customers. It depends on your business model. If, like most B2B companies, you are on annual subscriptions or contracts, your retention rate refers to the percentage of customers who have re-signed from one year to the next. So, if you have 200 customers, and 178 resign, your retention rate will be equal to : . In short, out of every 100 customers, 89 remain loyal to your company from one year to the next;
The life of your customers (or Customer Lifetime). It is about establishing the average length of time that the client requests your services. To calculate it, simply apply the following formula: Thus, the average customer stays 9.09 years with your company;
The average basket (or ticket) of your customers. This is simply the average value of each order. To calculate this indicator, simply divide the company’s turnover by the number of orders. With a turnover of 1 000 € for 20 orders, the average basket will be 500 €;
Average purchase frequency. To calculate it, simply divide the number of orders by the number of unique customers. For example, for 100 orders and 20 unique customers, the average purchase frequency is = 5 orders per year.
Once you have calculated (or estimated) these variables, you can calculate your Customer Lifetime Value (CLV) by applying the following formula:
Customer Lifetime Value (CLV) = Average Cart x Purchase Frequency x Customer Lifetime
Here’s a concrete example to help you understand: let’s say your average customer spends 100 euros a year with you, and stays loyal to your company for 5 years. If you don’t offer him any discount or gift to keep him loyal, his CLV will be 500 € (100 € x 5 years).
Now, let’s say you want to offer a 10% discount to your loyal customers, which represents an expense of 10 euros per year per loyal customer for your company (for an average basket of 100 €). In this case, your client’s CLV will be €450, which is (€100 – €10) x 5 years.
What are the limits of Customer Lifetime Value (CLV)
Like any indicator, the CLV has its limitations. The first is obvious: CLV is based on assumptions and estimates, not on hard data… unless you calculate it “retrospectively”, with hard data, on a historical customer that is no longer with you.
For example, you can’t know for sure how long a customer will stay loyal to your company or how much they will spend each year. This means that CLV can be inaccurate and only roughly reflect a customer’s true value to your business.
In addition, the CLV does not take into account all the factors that can affect the value of a customer to your company. For example, if you have a customer who buys from you frequently, but complains often and generates a lot of costs related to customer relationship management, their CLV may be lower than that of a customer who buys less frequently, but is more satisfied and less likely to complain.
In sum the CLV is an indicator that must be :
Nuanced when the data are extreme or outliers, such as a customer who calls on customer service very regularly;
Framed by complementary indicators, which brings us to the next point.
What are the complementary indicators to the CLV?
To address the limitations of the CLV, here are some additional indicators:
Retention or loyalty rate: This indicator measures the percentage of customers who remain loyal to your company over a given period of time. It can help you understand whether your retention efforts are effective and identify opportunities for improvement;
Referral rate: This indicator measures the percentage of customers who recommend your company to their friends and family. It can help you assess customer satisfaction and identify opportunities for growth;
Average basket: This indicator measures the average value of your customers’ purchases over a given period. It can help you understand whether your customers are spending more or less with you and identify upsell opportunities.
Our professional tips to boost your CLV
It is simple: the CLV is a quantity that is calculated by multiplying three variables. To increase it, you have to increase the value of at least one variable:
Increase the average basket, for example by marketing complementary products or services. This is called cross selling. In short, work on the sales pitch with your sales people to include other products or services;
Increase the frequency of purchase, by strengthening your marketing campaigns, especially with your actual customers. Promote products and services (complementary or superior to the product already purchased) to your actual customers;
Increase customer lifetime. This necessarily involves improving customer satisfaction. Quite a topic!
You can also optimize the expenses related to the acquisition and/or retention of your customers. And at this level, there is nothing better than automation to reduce the cost of production and boost the margin. And marketing automation means Twilead!
The Twilead Tip
Customer Lifetime Value (CLV) can be used to optimize online marketing campaigns by customer.
Using data on past purchases and future purchase forecasts for each customer, it is possible to determine the optimal marketing budget for each customer and thus maximize the CLV for each account.
For example, if a customer has a high CLV and you know they have the need and the means to make repeat purchases in the future, you might decide to invest more in online advertising, customer success management or emailing to encourage that customer to make more purchases.
Using this approach, it is possible to optimize ultra-targeted marketing campaigns by promoting cross selling and up selling while eliminating “unnecessary” marketing costs.
To conclude on the Customer Lifetime Value…
In summary, Customer Lifetime Value is a key indicator for companies that want to optimize their customer retention and acquisition strategy. It measures the total value generated by the average customer over the duration of their collaboration with the company, taking into account the expenses incurred to acquire and retain them.
Calculated in a predictive manner, the CLV helps you identify the spending limit for your acquisition and/or loyalty campaigns so that you never lose sight of your profitability objective.
Finally, it is important not to rely exclusively on the CLV and to complement this indicator with other KPIs such as the retention rate, the recommendation rate and the average basket.