Essentially, CLV is the total worth to a business of a customer over the whole period of their relationship. It’s an important metric as it costs less to keep an existing customers than it does to acquire new ones, so increasing the value of your existing customers is a great way to drive growth.
If the CLV of an average coffee shop customer is £10,000 and it costs more than £10,000 to acquire a new customer (advertising, marketing, offers etc.) the coffee chain could be losing money unless it pares back its acquisition costs.
Knowing the CLV helps businesses develop strategies like these to acquire new customers and retaining existing ones while maintaining their profit margins.
CLV is distinct from the Net Promoter Score (NPS) that measures customer loyalty and CSAT that measures customer satisfaction, because it is tangibly linked to revenue rather than a somewhat intangible promise of loyalty and satisfaction.
How do you measure CLV?
If you’ve bought a £40 Christmas tree from the same grower for the last 10 years, your CLV has been worth £400 to him. But as you can imagine, in bigger companies CLV gets more complicated to calculate.
Many companies shy away from measuring CLV, citing the challenges of segregated teams, inadequate systems and untargeted marketing.
When data from all areas of an organisation is integrated however, it becomes easier to calculate CLV.
CLV can be measured in the following way:
- Identify the touchpoints where the customer creates the value
- Integrate records to create the customer journey
- Measure revenue at each touchpoint
- Add together over the lifetime of that customer
At its simplest, the formula for measuring CLV is:
Customer revenue minus the costs of acquiring and serving the customer = CLV
Functions can be added to this simple formula to reflect multiple purchases, behaviour patterns and engagement to predict CLV.
Why CLV is important to your business
Ultimately, you don’t need to get bogged down in complex calculations – you just need to be mindful of the value that a customer provides over their lifetime relationship with you. By understanding the customer experience and measuring feedback at all key touchpoints, you can start to understand the key drivers of CLV.
It’s a great metric when you have a multi-year relationship with a customer – say for a paid TV subscription or mobile phone contract. And it’s good for spotting the early signs of attrition – say for example you see spend dropping off after the first year as they use the subscription less and less.
But how much are your customers costing you?
CLV is a great metric to track and optimise, but one thing to keep a close eye on too is the cost of that customer to your business.
This is where Cost to Serve comes in. If the cost of serving an existing customer becomes too high, you may be making a loss despite their seemingly high CLV.
So there’s a balancing act to negotiate here. To go back to our paid TV subscription, your cost to serve might be higher in the first year of a contract but gradually drop off the longer they stay with you.
So if your renewal rates drop, your average cost to serve is likely to rise and cause a drop in profitability.
Understanding these numbers over time and being able to track them side by side is the only way to get a true understanding not only of what’s driving customer spend and loyalty but also what it’s delivering back to the business’ bottom line.