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What Is CLV? Customer Lifetime Value Explained

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As a business owner, entrepreneur, or marketer, customer lifetime value is a really critical and elemental way of understanding your customers and the role they play in the mechanics of the business you’re involved in.

If you’re a business owner and you’re not sure what CLV is, then you should definitely read this, as working out what your clients are worth to your business, could mean the difference between success and failure of your marketing campaign, and ultimately your business.

What is Customer Lifetime Value?

Now, the textbook definition of client lifetime value probably reads something like customer lifetime value is a primary metric for understanding your customers. It’s a prediction of the value your relationship with the customer can bring to your business.

Simply put, it’s a measure of how much income a new client brings into your business multiplied by the typical number of times that customer will return to purchase again from you in future.

Why CLV is important for video marketing?

Frankly, customer lifetime value is an important metric, not just for marketing, but for all aspects of your business, because it’s a measure of how well you are looking after your clients, and how many times they are returning to do business with you.

This data allows you to understand what a new client is worth to your business, what they potentially would bring to the bottom line and therefore, it’s a really powerful guiding metric when it comes to setting the levels of your business marketing spend.

Why you should calculate CLV?

CLV is a gauge of the profits associated with any particular client relationship, and therefore you can it to inform how much it is worthwhile investing in it. Not only from a monetary standpoint, but also from a time standpoint too, depending on what kind of business you’re in.

So, for example, if you’re a plumber and your average boiler maintenance call-out say brings in £150, but then your average client will also return for a water tank service and that will be another £100. And you’re obviously really good at customer service, so your client retention rate is amazing, so the average client will stay with you for five years. In that case, the CLV for each client is £1,250.

So, what? Well, it illustrates the importance of encouraging your clients to come back to buy from you, but more importantly, perhaps it also informs you as to how much money it’s worth spending on recruiting new customers. So, in this case, the plumber might be happy to say, invest a hundred pounds or so in some Facebook ads, for example, but might be less enthused about investing £5,000 on a bespoke video, given that that’s about three times their average client lifetime value.

However, imagine you’re an accountant, and you charge your clients, say £2,000 a year for your services, and your client retention rate is obviously again, totally excellent, so your clients stick around with you for seven years.

In this case, the CLV would work out to be £14,000. So as an accountant with these figures in mind, it’s really worth you investing at a higher level to get new clients in the door.

So, in short, calculating your client lifetime value allows you to understand how much you can spend to acquire a similar customer and still have a profitable relationship. It also helps you understand what kinds of products customers with the highest CLV want, therefore, also which products have the highest profitability. And it also allows you to understand who the most profitable types of clients are.

Why you should calculate CLV?

So now we get to the numbery bit, how to calculate your client lifetime value. Now, luckily for everyone, it’s not Newtonian physics, it’s just this, it’s the average value of a purchase multiplied by the number of times the customer will buy each year, multiplied by the average length of the customer relationship in years. It’s a really simple little bit of maths, but it will give you a huge insight into what makes your business tick.

Why CLV is important for your business?

Now, that’s all great, but why should you care if you keep clients over an extended period? After all, in some cases, you can collect leads on social media for a few pence each, in some niches.

Now, according to research by eConsultancy, it is way easier to sell to an existing customer, which makes sense, they already know, like, and trust you. And so, a lot of the relationship building has already been done.

In fact, that research showed that the odds of successfully selling to an existing customer is around 60 to 70%. However, for new customers, that sales conversion rate is typically in the region of somewhere between five and 20%. So, the bottom line is, if you’ve got an existing customer base, they really are the low hanging fruit. So, it makes complete and out of business sense to invest time and effort into looking after them, and communicating with them post-sale to encourage future purchases.

I mean, it also makes you a good human as well, genuinely appreciating and caring about your customers, it’s just the right thing to do. And clearly, the more genuine this relationship is, the more likely your clients will turn into huge advocates for your business too. As with everything in life, it’s about give and get, the wonderful law of reciprocity. You give genuinely and unconditionally and you will find things happen for you.

So, what if having worked out your CLV, you actually want to improve things, maybe get your clients to come back more often or spend more on each of their trips.

Tips to increase CLV

What tactics could you employ to help this happen? Well, luckily again, it’s not rocket science.

Firstly, you’ve got to make it easy for customers to return items they’ve purchased from you. If you make it difficult or expensive, it will significantly reduce the odds of them making another purchase in future.

Also, set expectations with regards to delivery date, and always aim to under-promise and over-deliver. It’s so much better to say, promise a delivery by the 1st of August, and then actually have it in their hands by July the 20th, than obviously the other way around.

You could also, for example, create a rewards program to encourage repeat custom with rewards that are at both attainable and desirable. Or you could offer freebies for doing business with you to help build that brand loyalty. You could also use upsells to increase the average value of a customer transaction, which is effectively the equivalent of say, McDonald’s asking, “Would you like fries with that?” It’s an upsell.

Also, stay in touch. Long-term customers want to know you haven’t forgotten them, so make it easy for them to reach out to you as well.

Final Thoughts

Now, I hope this has helped to demystify and brought some kind of clarity to client lifetime value for you. I’d suggest that you scoot away, invest some time to do some sums and work out your CLV within your business.

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