In today's competitive world, not only corporations, but also small businesses and entrepreneurs need to focus on building lasting relationships with customers. One key indicator that can help understand the value of these relationships is CLV (Customer Lifetime Value). What exactly is it and how can it be measured? Here is a guide to help you better understand this important indicator.
What is CLV?
Customer Lifetime Value is the estimated amount of revenue a company can earn from one customer over the lifetime of their relationship with the company. In simple terms, CLV shows how valuable a customer is to your company throughout the time they use your products or services.
The lifetime value of a customer is not just a number, but an indicator that can influence many aspects of your business, such as your marketing strategy, customer loyalty and sales plans.
Why is CLV important?
Understanding and following the CLV has several key advantages:
- Improved customer segmentation: Allows you to identify your most valuable customers and focus on them.
- Optimisation of marketing costs: Helps to make decisions on marketing budget and resource allocation.
- Increasing customer loyalty: By understanding CLV, you can create better loyalty strategies that encourage long-term customer relationships.
- Revenue forecasting: Facilitates forecasting of future revenues and planning of long-term business goals.
How do you calculate the CLV?
There are several methods for calculating CLV, but here is a basic formula that can provide a starting point:
CLV = Average transaction value x Average number of transactions x Average duration of customer relationship
1. average transaction value
The first step is to calculate the average transaction value, i.e. the amount the average customer spends on a purchase. This can be calculated by dividing the total revenue by the number of transactions over a certain period.
2 Average number of transactions
You then need to determine how many times the average customer makes a purchase in a certain period of time. You can calculate this by dividing the number of transactions by the number of unique customers.
3. average duration of customer relationship
Finally, determine how long the average customer remains active. This can be calculated by analysing historical customer data and determining the average duration of the customer relationship.
Example of CLV calculation
To better understand how to calculate CLV, let us consider the example of a small company selling cosmetics online:
- The average transaction value is £100.
- The average number of transactions per customer is five per year.
- The average duration of a client relationship is three years.
CLV = £100 x 5 x 3 = £1,500
This means that the average customer brings £1,500 to the company over the lifetime of their relationship.
How to measure CLV?
There are many tools and software that can help calculate and track CLV. Some of these include:
- Google Analytics: Can provide detailed data on customer behaviour and transaction value.
- CRM (Customer Relationship Management): CRM systems, such as Salesforce or HubSpot, can automatically calculate CLV based on customer data.
- Business analytics: Tools such as Tableau or Power BI can help visualise and analyse CLV data.
Summary
CLV (Customer Lifetime Value) is a key indicator that can help to understand the value of customers and optimise business strategies. For small businesses and entrepreneurs, it is an invaluable tool for building lasting customer relationships.
If you want to learn more about how to improve CLV in your company? Sign up for our free consultation with an expert!