Customer Lifetime Value (CLV) is the total money a business earns from a customer during their entire relationship. It considers how much a customer spends each year, how long they stay, and the costs of acquiring and serving them. A higher CLV means more profit.
As a business owner, the last thing you want is to lose customers after working hard to gain their loyalty! That’s where Customer Lifetime Value (CLV) comes in. It helps you understand how much a customer is worth to your business over time.
Why does this matter? Because keeping customers is just as important as getting new ones. In fact, 25% of marketers say CLV is one of their top five metrics because it helps them see if their marketing efforts are working.
By knowing your most valuable customers, you can focus on keeping them satisfied through special offers, better service, and rewards. Also, customer lifetime value helps you find ways to keep customers coming back. This makes your business stronger in the long run.
Want to know more? In this article, let’s understand what customer lifetime value is and check its importance. Also, we will learn how to calculate customer lifetime value.
What is Customer Lifetime Value?
Customer lifetime value (CLV) is a way to measure how much money you can make from a customer over the entire time they buy from you. It helps you see how valuable a customer is, not just from one sale but from all their future purchases too.
To calculate CLV, you consider three important factors:
- First Purchase: How much do your customers spend when they buy from you for the first time?
- Repeat Purchases: How often do they come back and buy again?
- Time as a Customer: How long do they stay loyal to your business?
By analysing customer lifetime value, you can understand “customer loyalty”. Also, as per the general industry understanding, the higher the CLV, the less you need to spend on finding new customers.
Always remember that it is cheaper to keep an existing customer than to get a new one. A recent study showed that if a customer has already bought from you before, there is a 60% to 70% chance that they will buy from you again. But if you try to sell to a completely new customer, there is only a 5% to 20% chance that they will buy from you.
Why is Customer Lifetime Value Important?
Customer lifetime value allows you to understand how long a customer stays with your business and how much they spend. By calculating CLV for different types of customers, you can:
- Decide how much to spend on getting new customers: Ideally, you should not spend more than what you will earn from them.
- Know how much an average customer will spend over time: This helps in planning business growth.
- Understand what products high-value customers want So you can sell more of those products.
- Find out which products give you the most profit: This helps in stocking the right items.
- Identify which customers bring in the most sales: So you can focus on them.
- See who your best customers are: So you can reward and retain them.
- Track customer journey and churn rate: To know when and why customers stop buying.
How to Use Customer Lifetime Value to Make Business Decisions?
Once you have obtained your customer lifetime value, you need to compare it with two key factors:
- Compare CLV with Customer Acquisition Cost (CAC)
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- If CLV is higher than CAC, your business is profitable.
- If CLV is close to or lower than CAC, you are spending too much to get customers.
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- Compare CLV with Industry Standards
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- Research the average CLV in your industry (e.g., SaaS businesses usually have a CLV that is 3-5 times their CAC).
- If your CLV is lower than competitors, you may need to improve customer retention.
How to Calculate Customer Lifetime Value?
As mentioned above, customer lifetime value helps you understand how much money you can earn from a customer. To determine this, CLV considers:
- How much do your customers spend each year?
- How long do your customers stay with you?
- What are the costs of getting customers and serving them?
Based on this, we can mathematically represent the customer lifetime value formula as follows:
- Customer Lifetime Value = (Customer revenue per year × Number of years they stay) – Costs of acquiring and serving the customer
Usually, this formula works accurately if your customers spend about the same amount every year. For more clarity, let’s study a hypothetical example:
Example of Customer Lifetime Value
Let’s say you own a Software-as-a-Service (SaaS) business in India that provides inventory management software for small retailers. Recently, a retailer subscribed to your software. Let’s see how you can calculate customer lifetime value:
Step 1: Find the Customer’s Revenue Per Year
- The retailer subscribes to your software for Rs. 10,000 per year.
Step 2: Find the Duration of the Relationship
- On average, a customer stays with your business for 4 years.
Step 3: Find the Costs of Acquisition and Service
- Let’s say you spent Rs. 1,00,000 on ads and sales team salaries in a month and acquired 20 new customers.
- Your CAC would be Rs. 5,000 per customer (Rs. 1,00,00020 customers).
- Every year, you spend about Rs. 2,000 on customer support, software updates, and cloud hosting.
- Over 4 years, the total service cost is Rs. 2,000 × 4 = Rs. 8,000.
- Total costs = Rs. 5,000 (acquisition) + Rs. 8,000 (service) = Rs. 13,000.
Step 4: Apply the CLV Formula
- Customer Lifetime Value = (Customer revenue per year × Number of years they stay) – Costs of acquiring and serving the customer
- Customer Lifetime Value = (Rs. 10,000 × 4) – Rs. 13,000 = Rs. 27,000
- So, the Customer Lifetime Value (CLV) is Rs. 27,000.
Step 5: Comparing with CAC
- Upon comparing CLV (Rs. 27,000) with CAC (Rs. 5,000), you realize that it is 5.4 times.
- Since CLV is much higher than CAC, your business is profitable.
- You can spend more on marketing and customer support to grow faster.
Track CLV, Grow Profitably! Choose Atidiv to Help You.
By calculating Customer Lifetime Value (CLV), you can understand how much revenue a customer brings over their entire relationship. A higher CLV means your business is profitable. This allows you to invest more in customer retention and service improvements. By comparing CLV with Customer Acquisition Cost (CAC) and industry standards, businesses can determine if they are spending wisely or need to refine their strategies.
Do you want to increase CLV for your business? We at Atidiv specialise in:
- Personalised customer engagement
- Data-driven insights
- Boosting operational efficiency
- Building long-lasting customer relationships
Partner with Atidiv today to maximise your CLV and enhance customer retention!
FAQs on The Importance of Customer Lifetime Value
1. How can I increase my customer lifetime value?
To increase your CLV, focus on customer retention. You can increase it by offering:
- Loyalty programs
- Personalised support
- Better post-sales service
Also, try to upsell and cross-sell relevant products to your existing customers.
2. My CLV is low compared to competitors. What should I do?
You should analyse why customers leave. This analysis can be made by checking:
- Churn rates
- Service quality
- Pricing
Post-analysis, try to improve engagement through better onboarding, proactive customer support, and targeted offers. Also, optimise marketing spend to attract high-value customers who are likely to stay longer.
3. How do I reduce my Customer Acquisition Cost (CAC) while improving CLV?
To lower CAC, you can use referral programs and organic marketing (SEO, content marketing). Also, try to retain existing customers through better service and engagement. This increases customer lifetime value and reduces your reliance on costly new customer acquisitions.
4. How do I know if I’m spending too much to acquire customers?
The best way to know it is by comparing CLV to CAC. If CLV is at least 3-5 times your CAC, you are spending wisely. Whereas, if CAC is higher, prefer migrating to organic marketing strategies instead of heavy ad spending.
5. Is CLV important for small businesses, or is it only for large companies?
CLV is an important metric for small businesses as well because they have limited budgets. A high CLV ensures steady revenue and long-term sustainability. By constantly tracking customer lifetime value, small businesses can refine their strategies and grow.
