Customer Lifetime Value: Why It Matters & How to Calculate It

What is CLV (Customer Lifetime Value)?

CLV is the amount of money a customer is predicted to spend with your business for the duration of your relationship with that individual. It’s an important metric, and the way you approach it can both define your business and could vary significantly depending on what you’re trying to get from your business.

More than just a simple exchange of goods for money, CLV is a measurement of how valuable a customer is to your business over time. Of course, not all customers are valued equally. And because it’s less expensive to keep existing customers than it is to find new ones, keeping your CLV high can be essential to the success of your business. After all, a higher CLV means that you have more loyal customers.

How to calculate CLV

So, how do you measure CLV? You can estimate your Customer Lifetime Value with the following steps:

• Forecast a customer’s lifecycle with your business
• Estimate future products purchased to forecast future revenues
• Estimate the costs associated with producing and delivering future products
• Calculate the current value of those revenue amounts

While the process can seem intimidating, breaking it down into manageable steps can help.

A step by step guide to calculating customer lifetime value

In order to determine your CLV, you’ll need a few things:

• Average purchase value: Divide your company’s total revenue in a time period by the number of purchases in that same period.
• Average purchase frequency rate: This represents the average amount of orders from each customer.
• Customer value: Determine this number by multiplying your first two calculations: average purchase and average purchase frequency.
• Customer lifespan: This is the length of time a customer relationship typically lasts before that customer disengages from your business.
• Forecast revenue: Using the information you’ve determined in the first 4 steps, you can estimate how much revenue you can expect from an average customer. Simply multiply the customer value by the average customer lifespan.

Why CLV is important to your business

Customer Lifetime Value determines the financial value of each of your customers. In and of itself, that’s an important purpose. But CLV is also unique in that it can look forward, as opposed to a concept like customer profitability, which measures past activities in order to gain insights. Much like you should always be looking into the future to determine which products you should sell, various ways you can optimize your business, and how you might serve your customers better, CLV can forecast future activity to improve your bottom line.

So, what can you do with Customer Lifetime Value? And why should you care?

Advantages of CLV

Specific advantages of understanding Customer Lifetime Value include:

• CLV allows you to measure the financial impact of marketing campaigns, initiatives, and other activities.
• Understanding the financial impact of your marketing efforts will help your company align and ladder up to bigger financial targets in an organization—or start creating them if you’re a smaller operation.
• CLV can also change the way you think about marketing in terms of creating loyalty objectives or focusing spend on underutilized areas.
• CLV will help you find balance in terms of short-term and long-term marketing goals and demonstrate a better understanding of financial return on your investments.
• CLV encourages better decision making by teaching marketers to spend less time acquiring customers with lower value.
• And the bottom line? Effective management of your customers relationships, which leads to increased profitability—that’s perhaps the most obvious advantage of Customer Lifetime Value.

In summary, there are plenty of reasons why you should learn more about Customer Lifetime Value. When you consider the fact that it represents the literal value of a customer, it only makes sense to devote marketing spend toward implementing it.

Why customer lifetime value matters

Customer lifetime value is important because it allows you to maximize the value of every customer relationship. This means that you’re providing a better customer experience that keeps people around for longer, which can also help improve the quality of your products and services. The lifetime value of a customer is an essential metric for every business to consider.

Here are some more reasons why customer lifetime value matters:

• Helps to determine customer segmentation
• Measures customer loyalty
• Determines efficacy of marketing strategies
• Aids in judgment of product quality
• Increases profitability overall

Some common customer lifetime value mistakes

Of course, customer lifetime value isn’t a magical cure-all. Used improperly, CLV can actually waste time and money—which is the opposite of its intended purpose. There are a number of common mistakes marketers make when experimenting with CLV. Keep these in mind as you begin your work:

• Misalignment with company goals: You should strive for customer lifetime value that’s aligned with your company goals. When you’re developing a plan to improve CLV, make sure that plan is in alignment with your goals or it’s not going to get you where you want to go.
• Incorrect customer segmentation: Segmenting your customers helps you maximize the efficiency of your marketing campaign. Not only that but targeting customer segments with the wrong marketing efforts can also make your customers feel alienated. Proper customer segmentation is a key to improving CLV.
• Choosing an unrealistic number for your customer’s lifetime: There’s only so much you can get out of each customer, so you have to make sure your goals are realistic. If you choose an unrealistic number for customer lifetime value, you’ll never reach it.
• Neglecting to factor in flexibility over time: The world is constantly changing, which includes the prices of your products or services and the economy as a whole. CLV is going to change over time based on these changes, so don’t expect everything to go exactly as planned down to the number.

Improving customer lifetime value

Now that you know what CLV is, how to calculate it, why it matters, and some of the common mistakes that marketers make while working with it, it’s time to improve on it. We’ll go over 3 tactics below, but these are only a start. Like any other marketing effort, you should iterate as you go, learning more about your audience and improving the process along the way.

Improving your onboarding process

Email marketing is one of the best ways to improve your onboarding process. When somebody makes a purchase or signs up for an account, you can send an automated email to their inbox to welcome them. You can also use these automated emails to guide new customers through the next steps, which may include checking out your current sales, learning more about your products, or customizing their profile.

Making your customers feel special

Once you’ve onboarded new customers, it’s time to show them value.

When people value your brand, they want to feel like they’re a part of it. Whether you’re engaging with fans by sharing their content or giving your best customers a special shoutout, making your customers feel valued and special can go a long way. Things like giveaways, engaging with fans, and showing public appreciation for your best customers through social media can also help you build a digital presence.

From featuring fans in your content to surprising customers with something in the mail to helping customers do something they love, one key to increasing CLV is a focus on the people who support your brand.

Focusing on sales

Now that your customers understand how much you value them, it’s time to take a look at your sales. There are a few ways to optimize sales for your business. You can increase sales per order, increase sales over time, or reduce costs to serve customers.

By increasing sales, you can ensure that customers keep coming back for the foreseeable future. This increases CLV and supplies your company with a steady stream of revenue.

Does Mailchimp offer CLV insights?

In fact, we do. For eligible accounts with a connected store, Mailchimp can provide marketers with actionable predictions about future purchase behavior, using predictive modeling and past purchase data from your store. Built specifically for marketers, these insights can be used to quickly target messages to segments based on how likely customers are to buy from you again, and how much value they’re likely to bring to your business over time.

Even better? You don’t need to hire a data scientist or do any math on your end. Mailchimp automatically provides a breakdown of customers in your audience based on 2 types of predictive insights:

Customer lifetime value: See an overview of your customers, broken down by how much value they’re likely to bring to your store over time. We factor in spend amount, purchase frequency, length of time someone has been a customer, and more. And we use this information to categorize contacts into segments based on estimates about highest (and lowest) amount of value over time. For accounts with enough purchase data to calculate CLV, this information is accessible right in your audience dashboard, with segments you can instantly target campaigns to—so you can thank your most high-value customers in just a few clicks.

Learn more about customer lifetime value insights in Mailchimp.

Purchase likelihood: Mailchimp accounts with access to customer lifetime value will also see a breakdown of existing customers based on how likely they are to purchase from your store again. Using factors like how long someone’s been a customer, how frequently they purchase, and more, we show you segments of your contacts based on how likely they are to come back to buy. You can use these clickable segments in your audience dashboard to market to these customers however you need to. One example: reaching customers who may only be ‘moderately’ likely to come back and enticing them with a special offer.

Learn more about purchase likelihood insights in Mailchimp.

Both purchase likelihood and customer lifetime value can be used as segmentation criteria in Mailchimp, so you can filter contacts based on these insights and others. And when you do that, it becomes easy to create custom segments—and find exactly who you want to market to.

Use Mailchimp to optimize CLV

Ready to see what else you can do with your customer data in Mailchimp? Learn how our Marketing CRM tools can help you learn more about your customers and quickly target messages to specific segments of your audience—all from one CRM dashboard.