customer lifetime value (CLV)
Represents the financial worth of a customer to a company over the course of their relationship.
Customer Lifetime Value (CLV) is a metric that calculates the total estimated value of a customer to a business over the course of their relationship. It is a way for businesses to determine the worth of a customer and determine what kind of resources should be allocated to retain that customer. This metric takes into consideration factors such as how much a customer spends, how long they stay with the company, how frequently they make purchases, and the cost of acquisition, among other factors.
To calculate the CLV, you need to know the following information:
1. Average purchase value (APV) – The average amount of money a customer spends on each purchase.
2. Purchase frequency (PF) – The number of times a customer makes a purchase in a given time period.
3. Customer Lifespan (CL) – The number of years a customer is likely to remain a customer of the business.
Once you have this information, you can use the following formula to calculate the CLV:
CLV = APV x PF x CL
For example, if the average purchase value is $50, the purchase frequency is 4 times per year, and the customer lifespan is 5 years, then the CLV would be:
CLV = $50 x 4 x 5 = $1,000
This means that, on average, this customer would be worth $1,000 to the business over the course of their relationship.
Calculating CLV is important for businesses because it allows them to prioritize and allocate resources to retain high-value customers, improve services or product offerings, and understand the long-term value and profitability of their business.
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