What is customer lifetime value (CLV), and how it can help you forecast revenue?

What is customer lifetime value? 

CLV measures the complete revenue a business can predict from a customer during their entire relationship. It offers businesses a comprehensive view of a customer’s value by encompassing all purchases, subscriptions, and interactions over time. 

How customer lifetime value can support your business goals

Focusing on CLV provides businesses with several advantages:

• Allows businesses to recognize customers with high value, which allows them to prioritize keeping them through targeted marketing efforts
• Businesses can customize their offerings to cater to customer demands, which results in increased customer retention rates
• Minimizes customer acquisition expenses and maximizes the value derived from current customers
• “Companies can use CLV to help predict future revenue,” Yasin Arafat, Founder and CEO of DOPPCALL, advises. It enhances business planning and forecasting by providing a more accurate understanding of long-term revenue streams.

CLV provides the best advantage to businesses that rely on loyal, returning customers. Examples include:

• Subscription services
• E-commerce
• Financial services
• Self-care, such as salons and spas

How to calculate customer lifetime value

Depending on the business model, there are multiple formulas available to calculate lifetime value. Below, we’ll discuss two of the most popular options.

If you have a stable customer pattern, the simplified CLV formula can work well for you: 

For example: Consider a streaming platform with an average purchase value of $10, with a customer lifespan of three years, and an average purchase frequency of 12 times per year.

CLV = $10 x 12 x 3 = $360

A churn-based CLV formula offers a little more nuance based on how likely a customer is to leave:

To calculate the churn rate, use the following formula:

For example: A gym membership costs $30 per month at a frequency of 12 times per year. Your gym has a 20% annual churn rate. 

CLV = (30 x 1200) ÷ 0.20 = $1800

How to track & increase customer lifetime value

By tracking customer lifetime value, businesses can make better decisions based on real data. To increase customer lifetime value, use these strategies:

• Engage customers regularly through promos, newsletters, and social media. Hannah Parvaz, founder of Aperture, increases CLV by building effective onboarding flows. During lockdown, Parvaz started a daily newsletter written from her perspective that led to a 40% increase in conversion. Use a customer relationship management (CRM) platform to stay in touch with past customers.
• Reward customers for their loyalty. This includes cash back programs, punch cards, or tiered loyalty rewards that gamify the loyalty process.
• Work to keep customers by offering an excellent customer experience and issue resolution.
• Offer upsells and cross-sells to increase how often a customer makes a purchase.

The takeaway 

Knowing the customer lifetime value and working to increase it can help with growth and profitability of a business. To increase this metric, a business should focus on what it takes to keep a customer coming back through personalized marketing efforts, loyalty programs, and making customer satisfaction a priority.