What is Customer Lifetime Value?

I came across this concept when I was pursuing an online certification course on Marketing Analytics.

I am being honest here, understanding this concept requires some basic knowledge of Mathematics, Arithmetic to be precise.

I know what you must be thinking, Ah please keep the numbers away!

But hey, as a matter of fact, what good is marketing if there is no measurement to check your success?

What?

Very simply put, Customer Lifetime Value (CLV) is the average amount of money your customers will spend on your business over the entire duration of your relationship with your customer.

So let’s take an example, If I am buying the same brand of some product for 10 years and spending ₹10 per year, my CLV to the company would be ₹100 and then the company subtracts the money they have spent to attract my attention.

Make it easier, please?

Let’s dive in deeper

Say I am representing an e-commerce website selling handmade papers.

Now, this is not a unique product, there are lots of retailers on Amazon or Flipkart already selling this.

So I need to ensure I advertise about my product to point out the uniqueness of my product, as against my competitors.

Let’s assume I invested ₹10 in advertising.

Now a customer say, Mary, is an artist, and as a part of her profession she requires these handmade papers.

Every year she buys 5 sets of papers, and this continues for 10 years.

Now for me, the profit margin on each set is ₹10. So over the years, the profit I am earning from Mary is ₹500.

But is this my CLV?

Not yet, I need to subtract the money I invested in attracting her, which is ₹10.

My CLV is ₹490 for Mary

Formula?

CLV can be calculated in two ways because your data in regards to the customers can be collected in two ways too.

Firstly, a Historic way, this is taking into account the data you have from previous customers you have had.

Analyzing their spending and developing your understanding based on what worked then, and what can work now.

Secondly, Predictive way, as the name suggests, this one requires you to peek into the future and make predictions on customer buying habits to calculate the CLV.

The predictive way requires a lot more data which is not easily available to many companies and hence we will cover the historic way in this post.

Before calculating the CLV using the formula, you require the following data:

· The amount you invest in acquiring a customer (Customer Acquisition Cost)

· The profit margin you have

· The amount invested by your customer

· Duration of the relationship between you and your customer

The formula for this is-

CLV = Customer revenue per year X Duration of relationship in years – Total cost of acquiring the customers

Ways to increase?

While there are multiple ways to increase your CLV, I have noted down a few below which I believe are most important

1. Ensure the best Customer Experience

The customer experience comprises of everything, right from the time the customer knows about the product to even after the sale is made.

Great customer experience can ensure your customers stick to your brand over a long period of time and develop brand loyalty.

Maruti Suzuki is currently the market leader, and one of the main reasons for this is the after-sales experience.

2. Recognize and Reward your best customers

Every brand that has a loyalty program is indulging in a way to increase CLV.

When you shop at a Star Bazaar, you get reward points that can be redeemed later on other purchases.

This is an excellent way to know your customers would stick around.

3. Close the loop with unhappy customers

I believe this is the most important one, normally we tend to ignore the customers who are not happy with our services because we feel we have already lost out.

But, it makes a lot of sense to not give up so soon.

You need to track all those customers who moved away from your brand, so the mistakes aren’t repeated.

So go ahead and calculate your customer's worth to make the experience much better!