The customer lifetime value can provide you with significant support in the implementation of your marketing measures.
Acquiring a customer is often a difficult undertaking. Retaining customers over the long term is a supreme discipline. Many marketers are therefore concerned with the question:
How can I optimize new customer acquisition and customer loyalty and integrate them perfectly into the marketing strategy?
It should be clear to many that this goal is a lengthy process. But there is also a certain value behind the customer relationship, maybe not.
Therefore, in this article, we want to take a closer look at the so-called Customer Lifetime Value and explain what this term means and how to calculate this value using a simplified formula.
Customer lifetime value: definition and goals
The Customer Lifetime Value (CLV) is an average value that describes how much a customer brings to the company over the course of the customer’s entire life. This customer value does not only include past transactions. Also and above all current transactions and future purchases.
Since the customer’s lifetime value comes from business administration, it can also be described as the coverage amount that the customer realizes during the customer relationship with the company. But what does this customer value bring to the company?
The overall goal of it all is to optimize marketing campaigns for customer retention. As an important CLV, the Customer Lifetime Value helps campaigns to be better planned and cost structures to be designed more efficiently.
In addition, the CLV makes it clear what benefits the measures for maintaining customer relationships have. For example, if the value is low, you should also reduce the budget for customer acquisition and support. With CLV you can therefore strengthen customer acquisition, strengthen customer loyalty, control customer management and ultimately increase company profits.
The importance of the CLV for companies
Basically, you can not only optimize marketing campaigns with the CLV. Because the analysis of customer value can be useful for different departments in the company. The following business areas can use the customer value for themselves:
- Product development: You can use the Customer Lifetime Value during product development to find out whether you are actually meeting the needs and desires of customers with your products.
- Sales: Here, too, you can use the CLV to find out which segment is the most lucrative for you and which new customers you should concentrate on.
- Marketing: The customer value helps you to assess which marketing measures are profitable and how high the budget can be.
- Controlling and management: As a managing director, you can use CLV to convince relevant stakeholders and evaluate customer development.
- Customer relationship management: Especially in the area of customer management, customer value helps to develop concrete strategies and to use resources cost-efficiently.
Customer Lifetime Value: The Formula
A simple form of calculating customer value is the NPV method. Here you compare the expected customer-specific payments e t with the customer-specific payments a t for each period t (e.g. year) of the expected duration of the business relationship T. In addition, discounting is carried out according to the calculation interest rate i according to the number of periods.
Here is the formula for the calculation:
If you have the relevant data from your customers, you can use this in the formula to calculate the simplified customer value.
Advantages, disadvantages and criticism of the CLV
The customer lifetime value enables you to assess whether your marketing measures have been used in a targeted manner, whether they need optimization and whether the cost-benefit ratio is right. Because if the customer value is too low in direct relation to your investments, you have to fine-tune certain parts of your strategy.
If you take the CLV into account, you can achieve more profitable and successful customer loyalty in the long term. Of course, you always have to keep in mind that the formula is just a formula and you can add various variables to it.
At the same time, you have to remember that you are counting on forecasts. Therefore, you can never assume exact and definitive values at this point. Non-monetary factors are also not taken into account in the calculation, since situations such as recommendations would represent difficult variables within the customer base. It is therefore important to use the formula with care and only use it for rough orientation.
Frequently Asked Questions (FAQ) about Customer Lifetime Value
What is Customer Lifetime Value?
The Customer Lifetime Value (CLV) is an average value that describes how much a customer brings to the company over the course of the customer’s entire life.
Why do you need the Customer Lifetime Value?
As an important KPI, the customer lifetime value helps to ensure that marketing campaigns can be planned better and that cost structures can be designed more efficiently. In addition, the CLV makes it clear what benefits the measures for maintaining customer relationships have.
How meaningful is the customer lifetime value?
You should note that the formula is just a formula and you can add various variables to it. At the same time, you should be aware that you are counting on forecasts. Therefore, you can never assume exact and definitive values at this point. Non-monetary factors are also not taken into account in the calculation.