The Importance of Customer Lifetime Value

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If you’ve been reading up on marketing and businesses, you might have heard of CLV, short for customer lifetime value. The customer lifetime value is an important metric (particularly for E-commerce companies), as it attempts to predict the amount of money a customer will spend on your products for the period in which your customer is active. What it is fundamentally doing is tagging a value to your customer, giving you more insights on the state of your business, and helping you make a more informed plan for the future. This may sound confusing currently, but fret not. This article will guide you through the advantages of CLV, as opposed to the traditional methods used by companies these days.

1. It informs you of how much you should spend on customer acquisition.

Companies all over the world face a similar conundrum. They need customers, but whenever they try to acquire new customers, they often make temporary losses. However, such temporary deficits do not deter them from investing in customer acquisition simply because they believe that they will earn it back eventually. 

That might sound perfectly logical, but we know that that’s often not the case in reality. As much as customer acquisition is essential, there is a limit on how much a company should spend on it. There are many metrics for marketing analytics out there, but one can safely assume that CLV is the most well-rounded metric we have today. While some metrics (namely, conversion percentages, customer retention rates and customer profitability), can either predict your future revenue or measure your total revenue as of now, CLV combines all the crucial data for each and every customer. It is essentially the revenue you can reasonably expect from a customer. Once you know exactly how much you will be earning, it’ll be significantly easier to make a wise decision on how much you should be spending on acquiring customers.

2. It’s an alarm for bad product quality or poor publicity.

If you have an astoundingly low CLV, it’s a sign. It’s either your products and services are absolutely useless (or perhaps it doesn’t work as well you thought it would be), or your publicity team isn’t doing a satisfactory job in announcing to the world about the peculiar (in a good way) features of your products and services. 

3. It helps in designing a personalised experience for customers.

If prioritising your customers and making them the core of your business to provide a position experience and build lasting relationships sounds appealing to you, CLV is a metric you should never neglect. A customer-centric metric, CLV helps in segmenting your customers based on value and gives a better understanding of the different personas of your customers. In a similar vein, segmenting your customers means that you can personalise the kind of services and goods you provide, to better meet different people’s needs. While classifying customers based on their spendings might sound like the works of a profit-driven business, but that’s not entirely true. Whether your business is merely profit-driven or customer-centric is dependent on what actions you take after classifying them. For instance, your brand can suggest products and deals based on each and every customers’ spending power as well as their needs. This makes your brand more relevant to them!

4. The process of calculating CLV gives you many valuable insights.

The cool thing about CLV is that its benefits are not just found in the final value itself. As cliche as this may sound, the journey of calculating your company’s CLV is a rewarding one too. As mentioned in other articles, CLV is derived from many different quantities, which are all related to your customers’ spending habits. It forces you to think about the whole customer journey, not just the sale of your products. 

For instance, finding out the retention period (number of years in which customer remains an active buyer), makes you wonder why your customer would drop your brand after a certain number of years. Is it because of a change in their needs due to their age? Additionally, what does it mean if you see your retention period decreasing or increasing? Why do customers buy your products at a particular frequency? Is that because your product breaks down too fast? The 5W1H about your customers should come flooding into your mind when you’re calculating CLV, and this is why CLV is a metric a company should never ignore.

-> Calculate your Customer Lifetime Value Here [Calculator]

5. It helps a lot with customer retention.

As Marketing Metrics found out, the probability of selling to a new prospective customer is about 5%-20%, whereas the chance of selling to an existing customer is 60%-70%.

Evident in the numbers, it’s more profitable and efficient to focus on customer retention, rather than customer acquisition, and this is especially so when your company has attained a large-enough customer base. Moreover, acquiring customers often costs more than rewarding loyal customers with discounts and exclusive deals to encourage them to spend more.

CLV helps you identify your best customers, and once you know who they are, it opens up limitless possibilities to retain them. For instance, companies can dish out rewards to thank these customers for their strong support over the years. It can be simple actions like sending them a sweet message or a small little gift on their birthdays or perhaps, inviting them to special events and offer deals. Such gestures go a long way in customer retention. It makes the brand appear to be genuine and customer-centric, and few customers will not fall for that.

-> Find out ways to increase customer lifetime value [Article]

In fact, CLV can offer great assistance in cutting down customer acquisition costs. After establishing the profile of your biggest customers, you can focus your marketing efforts on people with similar profiles, instead of coming up with a generic marketing campaign that resonates weakly with people.

Other than highlighting and rewarding your best customers, CLV helps to identify your least valuable customers, so that you can direct your upselling efforts on these customers!

If you’re convinced about the power of CLV and want to incorporate it into your business model, the first step of your journey with CLV would be to calculate your company’s CLV. For all of you math-haters out there, here’s a special treat. Click here to calculate your CLV. By the way, don’t forget point 4 as you work out your CLV!

Once you’ve your CLV calculated, it’s time to augment it. To get started, check out this article!

This Article is Written By

Caroline Quek
Caroline Quek
Once in a blue moon, she comes out of hibernation and embarks on fanatical reading sprees. During her free time, she can be found squealing over horror movies and K-drama scenes.

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