So what is CLV? Customer lifetime value (CLV) is a forecast of the net profit that is expected to occur from the entire future relationship between a business and a customer. To put it another way, it can be defined as the overall financial value of each customer. This is an important value to know, as it represents the highest amount that a business should pay to acquire a new customer and/or to avoid losing a customer.
The theory driving the use of CLV is that for long-term business success, companies should focus less on quarterly profits and more on maintaining healthy, long-term connections with their customers. CLV encourages this shift by placing a concrete value on business-customer relationships, allowing companies to see how their profits are affected by their rapport with their clientele. For this reason, CLV is used mainly by relationship-focused companies, especially those involving customer contracts (e.g. B2B, banking, insurance services, and telecommunications).
One of the most useful aspects of CLV is its ability to aid in customer segmentation, a process that allows the company to identify the most profitable group of customers so that it can focus more on them and less on lower-profit clientele. This, in turn, allows companies to maximise their profits by investing marketing resources more heavily towards customers that are more likely to contribute higher profits.
Another benefit of CLV is that it monitors the impact of marketing strategies and investments on overall customer value. For instance, a CLV model can be used to show the value of a customer by comparing the customer’s £ value to the costs associated with acquiring the customer. This allows the business to determine an optimal level for investments in marketing and sales activities, ensuring that resources are allocated in such a way as to create a maximum return on investment.
A final advantage of using CLV is that it can be used to measure customer loyalty by looking at factors such as proportion, probability, and frequency of purchase.
However, even with all of these advantages, it must be noted that CLV must be used correctly if it is to be constructive. It is important to remember that CLV is not a static model, but a dynamic concept that fluctuates according to the inputs used to calculate it. It is also important to avoid focusing on current high-value customers at the expense of middle-value clientele that could attain a higher value if targeted with effective marketing.
In short, CLV is a very useful tool, and if utilised correctly, it can help relationship-oriented companies focus on high-value clientele to maximise profits and create more successful and sustainable business models.