Understanding Customer Lifetime Value

Chalana Williams, First Federal of Lakewood

Understanding Customer Lifetime Value

A widely recognized concept in marketing circles is customer lifetime value (CLV); however, not many business people without a marketing background understand what it is exactly or how to measure it properly. CLV is the forecasting of net profits that connect to a specific customer during their lifetime relationship with a business. To state it more simply, CLV is the financial value of a customer relationship over the lifetime of your relationship with that customer.

Why It is Important

CLV gives you an idea of the amount of repeat business you might be able to expect from a specific customer. This knowledge will assist you in deciding how much you can profitably invest in ‘buying’ this particular customer for your business.

Once you determine how much a customer buys and the frequency of their purchases, you will have a better understanding of how to manage your limited resources. Choosing between projects like customer retention programs or other services that you will need for keeping satisfied customers are easier with the right knowledge.

How to Calculate CLV

CLV is the total gross profit of a customer over the lifetime of the relationship LESS marketing, advertising, and incremental service or product fulfillment costs. This EQUALS the customer lifetime value.

Running Your Business to Optimize CLV

Below are only a few advantages offered by fully understanding and leveraging CLV:

• Recognizing and setting proper spending levels for marketing and customer acquisition.
• Understanding how to handle issues with customer service, when to give in, and when to back off—to know when the value is high enough to go the extra mile to retain the customer.
• Knowing now how much you can spend on client gifts.
• Making decisions will be easier when it comes to setting marketing budgets and spending for other areas of your business.
• Knowing now how to calculate commissions, incentives, and bonuses to compensate your sales team.

Ultimately, it is difficult to run a thriving business if you do not invest in bringing in new customers and satisfying the ones you already have. Overall, a diligent CLV strategy enables improved marketing strategies to not only increase customer retention, but boost revenue and gain a competitive advantage in the marketplace.