Customer Lifetime Value: Why do you need to measure it?

Customer Lifetime Value is one of the most important indicators that a brand must know and consider and there is no marketing strategy that can do without it. Do you know what Customer Lifetime Value is and why analyzing it is so important?

Stop here and give yourself a couple of minutes – I’m about to explain it to you.

What is Customer Lifetime Value

The Customer Lifetime Value ( CLV or LTV ) is the customer’s value over time, that is, it is a predictive analysis of the value that customer will have for your brand during the time span of the relationship you will establish.

The CLV is an indicator that identifies the potential value of your specific customer and measures the foreseeable profits that you can make from the relationship with him. This means that, based on the purchasing behavior of your customers, you can make long-term profitability forecasts.

The question that Customer Lifetime Value offers an answer is this: What is the total revenue I will get from the relationship with my customer? The word lifetime refers precisely to this peculiarity: the duration of the relationship with the customer.

When you acquire a new customer, in fact, this will have a specific cost for you, but how much will it allow you to earn over time?

And will it be more convenient for you to invest in finding new customers or will it be more convenient to invest in nurturing the relationship with the customers you have already won?

If you have put in place the right loyalty strategies, in fact, it is very likely that once you acquire your customer they will renew their trust and continue to buy from you. And, you know, a loyal customer is gold for a brand.

Furthermore, keep in mind that there are cases in which the turnover guaranteed by already acquired customers also allows us to support business strategies aimed at acquiring new customers, usually much more expensive.

And, again, the LVT is also a fundamental metric for evaluating the progress of Customer Relationship Management strategies, or rather of customer relationship management strategies.

Simplifying, if the LTV increases, then it means that the management strategies and activities are working; if the LTV decreases, it means that the strategy needs to be reviewed.

How to calculate the Customer Lifetime Value?

There are several ways to calculate CLV, and it’s not always that intuitive to do so, especially for large businesses such as Ungating Services. I suggest the most used formulas.

The most immediate formula to calculate the Customer Lifetime Value is this:

CLV = Customer’s Monthly Spend X Number of months in which he is loyal to the brand.

Another formula, more accurate and complex, is this:

CLV = Customer Generated Profits – (Customer Acquisition Cost + Customer Service Cost) X Number of months the relationship lasts.

In reality, to accurately measure Customer Lifetime Value, it is necessary to establish a careful Customer Journey , identify all the touchpoints where the customer creates value for the brand and measure the profits it generates in each of these points.

It is also important to constantly update this data for the duration of the relationship with the customer.

Another formula, even more complete, is this:

 CLV = Customer Value X the average customer duration.

• The Customer Value is calculated by multiplying the Average Purchase Value by the Average Purchase Frequency Rate of the customer;
• The customer’s Average Purchase Value is calculated by dividing the total revenue of the brand over a period of time by the number of purchases over the same period of time;
• the Average Purchase Frequency Rate is calculated by dividing the number of purchases by the number of unique customers who made purchases during that specific period of time.

The CLV is not the Cost of Acquisition per Customer

It is clear how the Customer Lifetime Value is very different from the CAC, that is to say from the cost it has for you to acquire a customer. This is also a fundamental metric for a brand’s business and marketing strategies.

You will understand well how one of the first things to keep an eye on is that the Customer Lifetime Value is higher than the Customer Acquisition Cost. Otherwise, it would mean that your business is doomed to fail.

How to improve CLV? With the right Customer Satisfaction and Customer Retention strategies. Suffice it to say that a study conducted by Bain & Company found that a 5% increase in the Retention Rate can lead the brand to an increase in profit between 25% and 95%.