What is Customer Lifetime Value (CLV) and Why Is It Important?

by / ⠀Entrepreneurship Finding Customers / March 11, 2022
Fully understanding customer lifetime value will empower any business owner to optimize where they allocate their business budget.

What’s the lifetime value of a customer? It’s tempting to think about this question only in terms of how many sales a customer generates.

But there’s more to a customer’s business value than that. A loyal long-term customer also means you can afford to acquire fewer new customers and spend less on marketing, for example.

That’s why it’s important to understand your customer’s true lifetime value — so you can optimize where you spend your business budget.

In this article, we’ll go over what customer lifetime value is, how to measure it, why it’s important, and how to improve it.

What is customer lifetime value?

Customer lifetime value (CLV) is how much a customer is worth to your business over the entire relationship period.

Sounds straightforward enough, but quantifying CLV can sometimes be quite difficult.

So let’s take a look at how to measure it.

Here’s how to measure CLV.

The basic formula for calculating customer lifetime value is this:

  • Customer Value x Average Customer Lifespan = Customer Lifetime Value

So say, for example, you sell a $10 monthly subscription to a video streaming service. If your customers stay with you for an average of two years, your CLV is $240 ($10 x 24 months).

Of course, measuring customer value is not that simple for many businesses. You may have a much more complicated sales structure than a monthly subscription fee.

Still, you don’t need an exact CLV number for it to be a helpful metric. Even if you have a rough idea of your CLV, it can help you make important decisions for your business.

Why is this so important?

CLV is important for a few reasons.

For one, CLV directly impacts revenue. So if you increase CLV, you increase your revenue and vice versa. This makes CLV a helpful signal of how your business is doing. You want CLV to be as high as possible.

Having a high CLV also allows you to lower your customer acquisition costs. After all, it costs less to keep good customers than it does to acquire new ones.

And when you do look for new customers, CLV can give you a better idea of what your budget should be and can help you target your ideal customer. That’s because you know what to look for in a customer.

Here’s how to improve your CLV.

So how exactly do you increase CLV? Well, there are several things you can do. Let’s go over a few:

  • Streamline the onboarding process. Your customer’s first experience with you can make or break the relationship.
    • Make sure the onboarding process is as seamless as possible.
  • Increase order volume. A smart way to improve CLV is to increase how much each customer buys.
    • If they order one product, try to upsell or cross-sell them on another.
    • That way, you increase their total at checkout and thereby also their CLV.
  • Build strong long-term relationships. The longer you retain a customer, the more value they will bring in over time. So try to build long-lasting relationships with them.
    • For instance, you might start a loyalty program with a card, app, or points system to help inspire repeat business. Anything to keep them coming back.
  • Improve customer service. There’s no better way to retain a customer than to go above and beyond for them.
    • If you provide top-notch customer service, they’ll notice and be more likely to stay with you.

Final Thoughts

Determining CLV can take some time, but once you get there, you stand to gain a lot. You’ll better understand how your business is doing and what it can do to improve. Start by trying to measure your CLV today. You won’t regret it!

About The Author

Kimberly Zhang

Editor in Chief of Under30CEO. I have a passion for helping educate the next generation of leaders.

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