What is customer lifetime value?
Customer lifetime value (CLV) is the lifetime monetary value of an average customer.
Here’s a great explanation from Shopify:
“The lifetime value of a customer, or customer lifetime value (CLV), represents the total amount of money a customer is expected to spend in your business, or on your products, during their lifetime.”
Providing you’re close to your numbers, calculating CLV is pretty straightforward. To do it, you’ll need to know:
- The average order value of your customers
- The average number of orders generated per customer
- The average number of years a customer shops with you
To work out your CLV, you’ll need to multiply the average order value by the average number of orders per year. Then, you’ll multiply the result by the average number of years a customer stays with you to get the result.
Let’s use an example.
Imagine you run a clothing business. An average customer spends £40 per order, shops with you five times a year and stays with you for ten years.
First, we’ll multiply £40 by 5. This sum shows us an average customer is worth £200 per year. We’ll then multiply this figure by 10, showing us that the average customer lifetime value is £2,000.
Let’s take a look at why understanding this figure is so valuable.
Why is measuring customer lifetime value important?
Measuring CLV is crucial because it gives you the most accurate reflection of your marketing efforts’ success.
Let’s say our clothing business launches a social media marketing campaign to an audience that excludes current customers. It costs them £4,000 to run and also gives them a return of £4,000.
On the surface, they’re breaking even.
However, when we consider CLV, the actual return of the campaign is much higher.
With an average order value of £40, we can accurately estimate the campaign brought in 100 new customers.
If a customer’s lifetime value is £2,000, the campaign will bring in £200,000 over ten years. That’s an immense 50X return on investment.
When we say marketing is an investment, not an expense, this is what we mean. You reap the rewards of a good campaign long after it finishes.
The advantages of measuring CLV
As you can see, measuring CLV is crucial because it provides the most accurate reflection of your marketing’s success.
But, there are several additional advantages you can also expect:
- Understanding CLV helps you establish how much to spend on new customer acquisition. For example, with our clothing store, we can comfortably afford to pay £200 to acquire a new customer as we know we’ll recoup that cost ten times over during their lifetime.
- It helps you understand and nurture relationships with your highest value customers. The higher value a customer is, the more likely they are to shop with you again. You can then deliver tailored marketing to these customers to improve overall CLV.
- High CLV customers are often brand advocates. Providing you treat them well through nurturing the relationship, they’ll reward you with word-of-mouth brand awareness and new business.
- Understanding who your highest lifetime value customers are can support product development. For instance, if our clothing store’s highest lifetime value customers regularly buy t-shirts but rarely buy shorts, we might want to invest more time developing new t-shirt designs.
Wrap-up
It’s worth noting that it’s far easier to improve something if you measure it than if you don’t.
In the example above, we used a static CLV. However, in an ideal situation, you should aim to increase your CLV over time.
When you factor in increased CLV through additional marketing channels, the return on marketing costs exponentially grows.
Measuring CLV is the most effective way of making this happen AND getting the maximum return from your marketing.