Want to know how to gain customers, boost profits, and save your budget? Among all metrics, there’s a special one that can tell you what value a customer brings to your company during the customer life cycle. Let’s unwrap the customer lifetime value (CLV) metric and make the most of it for your business.
What is customer lifetime value?
Customer lifetime value (CLV, or LTV for “lifetime value”) helps you predict future revenue and measure long-term business success. CLV tells you how much profit your company can expect from a typical client over the course of the relationship. More to the point, CLV helps you estimate how much you should invest in order to retain a customer.
Actually, that amount depends on your margins. One company may spend up to $1 to retain a customer while another spends up to $50. To figure out how much you should invest, you need to calculate the customer lifetime value for your business.
According to Marketing Metrics, there’s a 5–20% probability that you’ll sell your product or service to a new consumer, whereas the chance of selling it to an existing customer is about 60–70%. Retention is a lot cheaper than acquisition. Thus, successful marketers don’t focus only on strategies for acquiring new customers. They also work out tactics to retain customers and stimulate them to make more purchases. CLV gives an understanding of your promotion spendings, based on which you can further optimize and plan your budget. What’s more, CLV provides useful insights for how to encourage customers to spend more.