What is Customer Lifetime Value (CLV)?
ELI5 — The Simple Version
Imagine you own a small bakery. You have a regular customer, Sarah, who buys a loaf of bread every week. Over a year, Sarah buys 52 loaves. If each loaf costs $5, Sarah spends $260 annually at your bakery. If she keeps coming back for five years, her total spending reaches $1,300. This total is her Customer Lifetime Value (CLV) to your business. Knowing Sarah's CLV helps you decide how much to invest in keeping her happy or attracting more customers like her. For example, you might offer a loyalty card or special discounts to ensure she remains a regular. You wouldn’t spend $500 to attract a new customer like Sarah because her CLV is $1,300. CLV matters because it helps you allocate your marketing budget wisely. It shows who your most valuable customers are, so you can focus your efforts where they matter most.
Technical Deep Dive
Definition
Customer Lifetime Value (CLV) refers to the total revenue a business can expect from a single customer account throughout their relationship with the business. It helps determine the potential profit from a customer and guides marketing and customer acquisition strategies.
How It Works
- 1.Calculate the average purchase value: Divide total revenue by the number of purchases.
- 2.Determine purchase frequency: Divide the number of purchases by the number of customers.
- 3.Calculate customer value: Multiply the average purchase value by the purchase frequency.
- 4.Estimate customer lifespan: Average number of years a customer remains active.
- 5.Calculate CLV: Multiply customer value by customer lifespan.
Key Characteristics
- A long-term metric focusing on customer retention
- Guides marketing spend and resource allocation
- Varies significantly by industry and business model
Comparison
| Concept | Definition |
|---|---|
| Customer Lifetime Value | Total revenue expected from a customer over their lifetime with the company |
| Customer Acquisition Cost | Cost associated with acquiring a new customer |
| Average Order Value | Average amount spent each time a customer places an order |
Real-World Example
A SaaS company improved customer service, increasing their CLV by 20%. They used tools like Hotjar to analyze user behavior, leading to enhanced customer satisfaction and longer retention.
Best Practices
- Use tools like VWO and Optimizely for A/B testing to enhance customer experiences
- Regularly update CLV calculations as market conditions and customer behaviors change
- Segment customers based on CLV to tailor marketing approaches
Common Misconceptions
- CLV is static: It's dynamic and should be recalculated regularly.
- It's all about revenue: CLV also considers customer happiness and satisfaction.
- High CLV customers are always profitable: Not if acquisition costs are too high.