Understanding customer lifetime value (CLV)

CLV is the profitability of a customer over their entire relationship with the business. Businesses need to look at long-term customer satisfaction and relationship management, rather than short-term campaigns and quick wins – this approach leads to increased value over the entire lifetime of a customer and means that CLV is a metric central to any CRM (customer relationship management) initiative.

It’s important to look at your customer base and segment them according to how often they purchase and how much they spend with your company. Very often, customers who spend more cost more to acquire, but they might also stay with the company for longer. Referrals made by a customer can also be included as part of the revenue generated by the customer.

The key is to understand these costs and then target your CRM strategies appropriately. CLV lets you decide what a particular type of customer is really worth to your business, and then lets you decide how much you are willing to spend to win or retain them.

For example, a potential customer looking to purchase a digital camera is likely to search on Google for cameras. As a company selling digital cameras, your excellent search advert and compelling offer attract the potential customer, who clicks through to your website. Impressed with your product offering, the user purchases a camera from you, and signs up to your email newsletter as part of the payment process.

Analyzing the amount spent on your search campaign against the sales attributed to the campaign will give the cost per acquisition of each sale. In this case, this is the cost of acquiring the new customer.

As the user’s now signed up to your newsletter, each month you send her compelling information about products she might be interested in. These newsletters could be focused on her obvious interest in photography, and highlight additional products she can use with her new camera. The costs associated with sending these emails are the costs of maintaining the relationship with the customer. When she purchases from you again, these costs can be measured against the repeat sales likely to be made over the course of the customer’s lifetime.

Assuming that a customer buys a new camera every three years, moves up from a basic model to a more expensive model, perhaps buys a video recorder at a certain point – all of these allow a company to calculate a lifetime value and ensure that their spending on a particular customer is justified.