In this post, we’ll take a closer look at the concept of CLV – what does it mean, and why does it matter in relation to marketing your business?
CLV is a term that, among other marketing concepts, is part of my digital dictionary, but in this post, the concept will be expanded upon and made concrete with numbers.
Let’s get started!
How much are your customers worth?
CLV stands for Customer Lifetime Value. This value is essential to be aware of as part of your marketing strategy, as it can help determine how much you should invest in attracting specific target groups.
Read more about how email marketing can help ensure high customer lifetime value in my post here.
Let me give you an example of how CLV can be calculated:
First, you need to know your churn rate. This is the value that indicates how many customers you lose over a given period.
This could, for instance, span a year, and you calculate how many customers your company had at the beginning of the year, and how many remained at the end of it.
Let’s say your company had 2,000 customers in January.
By December, you had acquired 1,200 new customers, but 800 customers had left during the year.
The churn rate would then be calculated as follows:800 / (2000 + 1200) × 100 = 25
Your company’s churn rate is thus 25%, which gives an average customer lifetime of (1 / 0.25) = 4 years.
With this in mind, we can now calculate CLV:
Let’s say your average annual profit per customer is 1,200 DKK, and it costs you 600 DKK to acquire each customer. The calculation would then look like this:
4 × 1,200 – 600 = 4,200 DKK CLV
So, the total value an average customer contributes to your company is 4,200 DKK.
How can CLV be used?
By knowing the CLV value, it becomes easier for your business to calculate how many resources you should allocate in your marketing efforts to attract specific target groups.
In other words, it’s a way to calculate the most profitable way for your company to acquire more customers.
To calculate CLV, it’s essential to keep your company’s data up-to-date in order to analyze and perform calculations, as (albeit in a simplified way) demonstrated in this post.
Additionally, it can be beneficial to know the CLV value if your company aims to increase it. Which specific parameters can be adjusted to achieve a higher customer lifetime value? And how much does it make sense to invest in ads and campaigns to attract new customers?
CLV also becomes even more useful when you start segmenting your customers by CLV value – where do the customers with the highest lifetime value come from?
What demographic information can tell us more about these groups, and which products are especially suited for them?
The above are just a few examples of how CLV can be used in practice. I hope this post has given you a better understanding of CLV and what it can contribute to your business.
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