Customer Life Time Value is the predicted net profit attributed to the entire future relationship with a customer. CLTV also defines the upper limit for Customer acquisition.
Client lifetime value calculation, sometimes known as lifetime value (LTV), is the profit margin an organization anticipates making throughout a typical customer relationship.
Customer acquisition costs (CAC), ongoing sales and marketing expenditures, operating costs, and the cost necessary to produce the goods and services the business offers must all be considered when calculating customer lifetime value.
The customer’s lifetime value is the estimated net profit attributable to a client’s future relationship. CLTV also defines the maximum threshold for Client Acquisition.
Customer lifetime value helps you understand the growth and revenue value of each customer over time. This metric is important to any business because it can help your business:
Boost customer loyalty
Reduce churn
Improve strategic decision-making
For example, you can use customer lifetime value to find the customer segments that are most valuable to your company.
Here are some other reasons why understanding your CLV is essential.
1. Increasing CLV can increase revenue over time.
The longer the lifecycle or the more value a customer brings during that lifecycle, the more revenue a business earns.
Therefore, tracking and improving CLV results in more revenue.
CLV helps you find the specific customers that contribute the most revenue to your business. You can use this information to segment your audience by the value those customers bring.
Once you find those customers, you can encourage repeat purchases and find specific cross-selling and upselling opportunities for different segments of your audience. Or you can tailor your products or marketing to your highest spenders to keep them coming back for more.
2. It can help you identify issues so you can boost customer loyalty and retention.
If CLV is a priority in your business, you can use it to identify impactful trends in your customer data. This insight can help you stay ahead of the competition with action items to address those changes.
CLV helps you understand customer behavior, preferences, and spending patterns. With this analysis, you can improve your data-driven decision-making. This leads to more personalized marketing strategies for growth.
For example, say your CLV is low. You can work to optimize your customer support strategy or loyalty program to better meet the needs of your customers. Or you can optimize a new product to attract higher-value customers.
3. It helps you target your ideal customers.
Customer lifetime value tracking makes it easier to segment your customers. You can segment based on profitability, customer needs, preferences, or behavior.
When you know the lifetime value of a customer, you also know how much money they spend with your business over some time — whether it's $50, $500, or $5000.
Armed with that knowledge, you can develop a customer acquisition strategy that targets customers who will spend the most at your business. You can personalize marketing to attract and retain them, and effectively allocate resources to get the most value from your efforts.
4. Increasing CLV can help reduce customer acquisition costs.
Acquiring new customers can be costly, and it's less expensive to retain a customer than it is to acquire a new one.
Customer lifetime value can help reduce costs with a focus on retaining existing customers. If you can keep a customer happy long-term, then you can improve their value to the business.
Using CLV metrics can improve customer loyalty and word-of-mouth referrals — it can also reduce marketing and sales expenses.
5. CLV can simplify financial planning.
The financial health of a business is often a big concern for CEOs and business owners.
Customer lifetime value helps you get a clear picture of your customer's relationship with your business and products. It can offer insights into future revenue streams and changes in customer behavior.
This knowledge can help you make more accurate predictions about future cash flows. So, CLV helps you reliably forecast revenue and plan the financial future of your business.
6. CLV trends can show you how to improve your products and services.
Understanding CLV can give you a better understanding of the value customers get from specific products or services.
With insights from your CLV, you'll have a clear direction for further analysis. This may guide you to look at customer feedback and behavior, update pain points, or change your approach to product development.
Lifetime value data can help you find where to make key improvements that align with customer needs and boost satisfaction. This not only strengthens customer loyalty but also differentiates your company from competitors.
Now that we understand the importance of customer lifetime value, let's talk about the two main customer lifetime value models.
