CLV

Customer Lifetime Value (CLV) is a useful metric for monitoring how much a customer has spent or is expected to spend on a company’s products and services throughout their entire interaction with the company.

Specifically, understanding Customer Lifetime Value helps businesses make strategic marketing decisions by identifying the most profitable customers and creating targeted campaigns. It also helps improve customer experience with personalized services and offers. This allows for more efficient budget investment by focusing on customers with higher CLV and facilitates long-term financial planning.

For instance, knowing the CLV of your customers helps determine whether it’s more beneficial for the company to invest resources in acquiring new customers or retaining existing ones. The higher the Customer Lifetime Value, the more valuable the customer is to the company as they will generate more revenue over time.

Loyalty management projects significantly increase customer lifetime value, and their success is measured by CLV as one of the main KPIs.

How is Customer Lifetime Value calculated?

There are several models to calculate a customer’s CLV. The two most commonly used are the classic model and the predictive model.

The classic model examines data and assesses customer value based solely on existing transactions; the predictive model anticipates a customer’s future value by examining historical data in the context of other factors, such as purchase frequency and demographic data (age, education, country, etc.).

Generally, to get an indicative calculation of Customer Lifetime Value, you need to multiply:

• the average duration of the relationship between the customer and the company;
• the customer’s average annual spending;
• the company’s profit margin.

However, this would not be an exhaustive calculation as there are multiple indirect contributions to consider, such as word-of-mouth or a positive customer review. Considering these network effects in calculating a customer’s CLV can be challenging, but fortunately, technology helps in this regard.

For instance, with Salesforce’s Loyalty Management solution you can foster relationships and create loyalty with AI predictive capabilities built directly into your Salesforce CRM.