Customer lifetime value (CLV) is an important KPI that measures the total revenue a business can expect to generate from a single customer.
Customer lifetime value is the sum of all the profits that a customer will add to your business. It's a financial metric that is used by many e-commerce companies to understand the profit potential of a customer in relation to the cost of acquiring them.
To calculate CLV, you need to know how much profit each individual customer has generated for your business and how much it costs you to bring that person into your funnel. The total of these two numbers determines your customer lifetime value.
What is Customer Lifetime Value (CLV)?
Customer lifetime value is the amount of profit that you expect to receive from a customer before they stop buying from your business. The lifetime value of your customers can be calculated by multiplying their profit margin by the total number of transactions they make with your company.
Companies use this metric to determine which customers are worth bringing in because it takes into account how profitable each customer is over the course of their relationship with the business. It's important for companies to know their CLV so that they can focus on acquiring customers who will provide them with the most profit.
For example, say you're running an e-commerce site and you spend $100 on ads to bring in a new customer. Now, let's say that new customer purchases items from your store for $200 in one year. You would calculate their CLV as $300 (their initial purchase + year 1 profits).
Why Do I Need to Calculate CLV?
It's important to be able to calculate CLV because you can't determine if a customer is profitable unless you know how much it cost you to bring them into your funnel.
For example, let's say Jane has a CLV of $3,000 and a CAC* of $100, she would have a good lifetime value—even if the average customer only generates $1,000 in profit. However, if Jane had a CLV of $3,000 and a CAC* of $500, then her lifetime value would be negative.
In this case, it would be better for Jane to find other ways to generate revenue from her customers before investing more time and money into attracting new customers.
What should I do with my Customer Lifetime Value?
CLV is an important metric that can help you make decisions about your marketing strategy. Inputting your estimated lifetime value (LTV) will help you determine which type of advertising will work best for your business.
For instance: If you want to invest in PPC ads, but don't have enough profit coming in from the average customer who buys from your company, maybe it's time to decrease prices or offer discounts so that you can bring more people into the funnel.
How Can I Calculate Customer Lifetime Value (CLV)?
There are a few ways that you can calculate customer lifetime value.
The first way is the simplest and only requires access to your customer data. You can use a calculator, like a spreadsheet or excel, to add up all the profits from each customer. This will give you a total of your CLV.
Another way to calculate customer lifetime value is by using an equation. The following equation shows how you would calculate CLV:
CLV = [(Profit from Customers) – (Lost Profit from Customers)]/ Cost of Acquisition
In this formula, Cost of Acquisition means whatever it cost you in terms of marketing or advertising to bring in each individual customer. The Lost Profit from Customers means what profits were lost because a potential sale was not converted into a conversion. If a person leaves without making a purchase, they'll have cost your company money in terms of lost sales when their potential becomes your potential loss.
For example, if someone spent $500 on your website and left without making any purchases but did purchase something elsewhere for $1000 dollars, they would have cost your company 500 dollars in lost profit which would be put under the Lost Profit From Customer category.
How to Use CLV in Marketing Strategy?
Your marketing strategy will be different depending on how important customer lifetime value is to your company. If you have a customer lifetime value of $1,000, for instance, you would want to invest more in marketing efforts that are high-touch and high-cost. These actions are typically the ones that generate higher CLV for your business.
The most common way to use CLV in your marketing strategy is to determine the cost per lead using the following equation:
Cost/lead = CLV/Cost
Where cost equals the cost per acquisition and CLV equals customer lifetime value.
For example, if it costs you $100 to acquire a new customer through paid ads but that person has a CLV of $500 then your cost per lead would equal $50.
Customer Lifetime Value (CLV) is the total value of a customer over the course of their entire customer lifetime. The first step to figuring out CLV is to calculate how much it costs to acquire a customer and how much revenue you receive from each customer. Once you have these two pieces of information you can calculate CLV by multiplying the two numbers together.
CLV is a valuable metric because it helps you understand how much you should be investing in marketing and other activities that drive new customers. For example, if your CLV is $1000 and you're spending $200 on marketing, then your investment into marketing is 4x.