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Everything you need to know about CLV

October 10, 2019 | Divya Khare

Blog / Everything you need to know about CLV

Customer Lifetime Value is a metric that indicates the total revenue a business can reasonably expect from a single customer account. It considers a customer’s revenue value, and compares that number to the company’s predicted customer lifespan. Businesses use this metric to identify significant customer segments that are the most valuable to the company.

  • LTV tells companies how much revenue they can expect one customer to generate over the course of the business relationship. The longer a customer continues to purchase from a company, the greater their lifetime value becomes. Which business owner or marketer doesn’t want to know that information?

This is something that customer support and success teams have direct influence over during the customer’s journey. Customer support reps and customer success managers play key roles in solving problems and offering recommendations that influence customers to stay loyal to a company — or to churn.


Why should you be caring about LTV 

Your customers aren’t just worth the amount of money they spend on your business today. They have future value if you’re able to retain them as customers. Customer lifetime value is important because, the higher the number, the greater the profits. You’ll always have to spend money to acquire new customers and to retain existing ones, but the former costs five times as much.

When you know your customer lifetime value, you can improve it. Work on retaining your existing customers through email marketing, content marketing, Account-Based marketing, social media marketing, and more. You still want new customers, but don’t forget about the old ones.

CLTV is the single most important metric for understanding your customers. CLTV helps you make important business decisions about sales, marketing, product development, and customer support. For example:

  1. Marketing: How much should I spend to acquire a customer?
  2. Product: How can I offer products and services tailored for my best customers?
  3. Customer support: How much should I spend to service and retain a customer?
  4. Sales: What types of customers should sales reps spend the most time on trying to acquire?

How to calculate LTV 

Several different methods exist to calculate LTV. The customer lifetime value can be either historic or predictive. In other words, you might want to calculate LTV based on actual purchases over the years or based on what you predict customers will spend.

Regardless, you need to know the average profit margin for purchases, the amount you spend to acquire a customer — customer acquisition cost — and the length of your relationship with customers.

The way you calculate customer lifetime value can also vary based on your business model. For instance, it’s easier to calculate LTV if you have a subscription model than if you’re in e-commerce. That’s because sales become more predictive.

Companies like BarkBox and ButcherBox charge the same amount every month for their deliveries, and their customers pay monthly or annually. It’s harder to predict how often a customer will return to buy new socks from your online retail storefront.

Many companies predict CLVs only by looking at the total monetary amount of sales, without understanding context. For example, a customer who makes one big order might be less valuable than another customer who buys multiple times, but in smaller amounts. CLV modeling can help you better understand the buying profile of your customers and help you value your business more accurately. They can also help you can prioritize your next actions, such as the following:

-> Decide how much to invest in advertising.
-> Decide which customers to target with advertising.
-> Plan how to move customers from one segment to another.

Three important inputs into CLV models are recency, frequency, and monetary value:

  • Recency: When was the customer’s last order?
  • Frequency: How often do they buy?
  • Monetary: What amount do they spend?

The following diagram shows a succession of past sales for a set of four customers.

RFM values

The diagram illustrates the RFM values for the customers, showing for each customer:

  • Recency: The time between the last purchase and today, represented by the distance between the leftmost circle and the vertical dotted line that’s labeled Now.
  • Frequency: The time between purchases, represented by the distance between the circles on a single line.
  • Monetary: The amount of money spent on each purchase, represented by the size of the circle. This amount could be the average order value or the quantity of products that the customer ordered.

We at Pluto7, are a premier Google Cloud Partner specializing in transforming marketing activities of Companies with AI driven solutions. Our work helps companies increase the LTV of their customers , deliver a seamless omnichannel buying experience and use predictive insights to plan for a more profitable future. If you want to know how to build a robust and scalable AI-driven marketing engine for your business get in touch with us.