Customer lifetime value (CLV) is a metric that estimates the total amount of revenue or profit a business is expected to generate from a single customer throughout their entire relationship with the company.
CLV is calculated by multiplying the average purchase transaction value by the number of sales transactions and then adding in any additional revenue generated from that customer.
CLV is an important metric for businesses to measure and understand because it indicates the total revenue a business can expect to bring in from a typical customer throughout their entire relationship with the company. CLV helps businesses better understand their customers and their potential business value, allowing the company to make more informed decisions about marketing, product development, and customer service.
By understanding the value of each customer, companies can focus their efforts on retaining those customers who bring in the most revenue, or reduce investments in customers less likely to provide revenue. This helps companies maximize profits by focusing on high-value customers and providing them with satisfying experiences that will keep them coming back. Additionally, understanding CLV allows companies to identify potential areas of improvement in order to increase customer loyalty and retention rates.
Measuring customer lifetime value is essential for any business looking to maximize profits and build strong relationships with its customers. By understanding this metric, companies can make more informed decisions about how best to serve their customers and ensure they remain loyal for years to come.
This will vary depending on each individual business and industry, but in general, a good customer lifetime value score is one that exceeds the costs associated with acquiring and servicing that customer. As a benchmark, businesses should aim for a CLV that is at least 3x the sum of marketing, sales, production, and shipping costs.
To analyse customer lifetime value, start by collecting data on the lifetime cost of obtaining and servicing customers and comparing it to the revenue generated by those customers. This can be done by looking at purchase history and frequency, customer support costs, average transaction size, and other metrics. Once you have that data, calculate the overall cost/benefit ratio of your customers and then compare it with industry standards or averages to understand where your business stands in relation to the competition.
Over time, businesses can work to improve their customer lifetime value by:
Providing customers with high-quality, timely assistance helps to build loyalty and keeps them coming back.
Tailoring deals and promotions to individual customers gives them the feeling that you value their business.
Offering opportunities such as surveys or Q&As can help establish stronger relationships between your business and its customers.
Incentivizing customers who refer others can bring in additional business at a lower cost.
Taking into account factors such as segmentation, discounting, bundling, and dynamic pricing can help maximize revenue from existing customers.
Using automated campaigns like upsell, cross-sell, abandonment, and replenishment can help to drive additional revenue across all your channels and recover otherwise lost sales revenue.
SAP Emarsys helps leading brands like PUMA, Pizza Hut, and Nike connect their sales, product, and customer data, creating better customer experiences that drive customer lifetime value and increase revenue.
