CLV or Customer Lifetime Value is a calculation that is used for business growth and intelligence that informs you of the value of each customer. This value is a critical indicator used to indicate the value of your company. The calculation assists in determining the net profit expected from each customer's lifetime purchase value. CLV is also known as LTV (Lifetime Value), LCV (Lifetime Customer Value), or CLTV (Customer Lifetime Value).
CLV shows your business the approximate value of each customer. This means that the information allows you to make decisions that will help retain and attract your most ideal customers. This means by utilizing this tool, you will be able to increase your profit potential by learning who your most valuable customers are. For example, your Customer Lifetime Value for one customer is $110,000. It will cost you $20,000/year to use your business to satisfy the needs of this customer. The initial cost to acquire the customer was $30,000. This means you will only want to keep this customer for four years. After that, you will be losing money on this particular customer.
CLV Calculation: = Margin * (Retention Rate ÷ [1 + Discount Rate]) - Retention Rate
Customer Lifetime Value (CLV) helps you figure out your ideal customers that will bring the most potential at generating your revenue. By having detailed information about what your best customers desire, you can target that specific market. In doing so, you will save money by targeting the consumer segments which yield the highest profit for your business.
Lifetime Customer Value will benefit your understanding of what your business can afford to spend on acquisition of new customers. As a result, you will learn what revenue a new customer will bring. This will allow you to allocate your budget accordingly.
When searching for additional funding and analyzing purchase offers, the value of each customer and the expected growth are important to know. CLV helps you understand the overall value each customer brings into your firm and better evaluate the total worth of your company.
Measuring which customers are most loyal can help you manage customer relationships and determine which are most profitable. Understanding factors of purchase probability and frequency, through CLV, will help you decide the effort you should put forth to retain certain customer segments.