What Is Customer Lifetime Value and How to Calculate It

Every customer has a different value to your business. Some only buy once, while others keep coming back because they are satisfied with your services/products.

This is where it becomes important to understand how much value a customer can provide in the long term. This concept is known as customer lifetime value (CLV).

CLV can help you assess the long-term relationship between customers and your business more strategically. If you want to know how to calculate and maximize it, you can read the full explanation below!

What Is Customer Lifetime Value?

Customer lifetime value, or CLV for short, is a metric for calculating the total profit that a single customer can provide to a business over their time as a customer.

Simply put, CLV helps your business understand the economic value of a customer and how long they can provide profits.

Knowing the CLV helps you determine more appropriate marketing strategies, such as how much it is worth spending to gain and retain customers.

How to Calculate Customer Lifetime Value and Its Examples

There are two approaches to calculating CLV: using historical customer lifetime value (historical CLV) and predictive customer lifetime value (predictive CLV).

Historical CLV calculates customer value based on past transaction data to understand customer performance without predicting the future.

Meanwhile, predictive CLV estimates future customer value using machine learning and artificial intelligence algorithms to project future purchasing behavior, retention rates, and profit potential.

Here is the formula for calculating customer lifetime value:

CLV = Average Transaction Value × Purchase Frequency × Length of Customer Relationship

Calculation example:

If a customer spends an average of IDR 400,000 per transaction, makes 5 purchases per year, and has been a customer for 2 years, then:

CLV = Average Transaction Value × Purchase Frequency × Length of Customer Relationship

= IDR 400,000 × 5 × 2

= IDR 4,000,000

This means that one customer could generate Rp4 million in revenue as long as they continue to interact and transact with your business.

Read also: What Is Retention Rate? Definition & How to Calculate It?

Why You Should Calculate Customer Lifetime Value?

By calculating CLV, you can understand how much value customers can bring to your business. Here are some reasons why calculating CLV is important:

• Knowing the true value of customers: By calculating CLV, you can understand how much profit each customer generates as long as they continue to interact with your business.
• Helping determine marketing budgets: CLV enables you to set reasonable limits for promotion and customer acquisition costs to remain profitable.
• Improving customer retention strategies: By knowing your most valuable customers, you can focus on retaining them through excellent service and effective loyalty programs.
• Optimizing long-term revenue: By understanding CLV, you can prioritize high-value customers and build more sustainable relationships.
• Supporting data-driven decision-making: CLV provides a long-term view of business performance, enabling sales and marketing strategies to be more focused and efficient.

How to Increase Customer Lifetime Value

Here are some effective strategies you can implement to increase customer lifetime value in your business or company:

1. Provide a Consistent Customer Experience

Customers who feel valued tend to stay longer. Provide fast, friendly, and solution-oriented service at every point of contact, both online and offline.

Ensure a smooth customer experience from the moment they learn about the product to after-sales service. A positive experience will encourage them to continue shopping and recommend your brand to others.

2. Build a Loyalty Program

Also, consider providing incentives for loyal customers through reward programs, shopping points, or cashback. This strategy not only encourages repeat purchases but also creates an emotional connection with your brand.

Read also: The Role of Brand Advocacy Marketing & Tips to Build It

3. Develop Upselling and Cross-selling Strategies

Offer complementary products (cross-selling) or premium versions (upselling) to increase transaction value. For example, customers who buy shoes can be offered exclusive socks or shoe care products. This strategy can increase total transaction value without adding to acquisition costs.

4. Optimize Customer Support

Fast and responsive customer service also increases satisfaction with your brand. Ensure your customer support team can provide effective solutions via chat, email, or social media.

With responsive and communicative service, customers will feel cared for and are more likely to maintain a long-term relationship with your business.

5. Build Customer Relationship Management

Building a strong Customer Relationship Management (CRM) system helps businesses understand customer behavior and needs.

Through CRM, customer data can be managed in a structured manner, enabling you to create relevant communications, provide timely offers, and strengthen customer loyalty to your brand.

6. Be Present on Every Digital Platform

Brand presence across various digital channels is essential for maintaining a consistent customer relationship. Ensure your business is active on social media, websites, marketplaces, and other communication channels so that customers can easily find, interact with, and stay connected to your brand.

That concludes our discussion of customer lifetime value (CLV), including how to calculate it and increase it as an important strategy for retaining customers and boosting business profits.

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Read also: How to Calculate Churn Rate in Your Business, Take Note!