Customer Lifetime Value (CLV or LTV) is a metric that measures the predicted amount of money a customer is expected to spend on a company's products or services over the entire duration of their relationship.
In other words, CLV is the total value a customer brings to a company over their lifetime. It takes into account various factors such as the amount of money a customer spends on average, the frequency of their purchases, and how long they are expected to remain a customer.
CLV is an important metric for businesses because it helps them understand the true value of a customer beyond just their immediate purchases. Knowing the expected lifetime value of a customer can help a company make informed decisions about how much to invest in acquiring and retaining them.
Calculating CLV involves a series of steps, including:
Determining the average purchase value (APV) of a customer- this is the average amount of money a customer spends on a single purchase.
Calculating the purchase frequency (PF) - this is the number of purchases a customer makes over a specific period.
Establishing the customer's lifetime (L) - this is the length of time a customer is expected to remain loyal to a company.
Multiplying APV, PF, and L - this gives us the predicted CLV of a customer.
It is important to note that CLV is not a one-time calculation but is an ongoing process that requires constant updating and analysis. As a customer's behavior or business environment changes, their predicted lifetime value may also shift.
In conclusion, CLV is a useful metric that helps businesses gauge the long-term value of their customers and make informed decisions about where to allocate resources. By focusing on retaining high-value customers, businesses can improve customer loyalty, drive revenue growth, and increase profitability over time.