Customer Lifetime Value is the single most important metric for understanding your customers. CLV helps you make important business decisions about sales, marketing, product development, and customer support. For example:
When calculating CLV there are many nuances to consider based on what the specific questions are that you want answered. But the most straightforward way to calculate CLV is to take the revenue you earn from a customer and subtract out the money spent on acquiring and serving them.
Performing in-depth customer lifetime value analysis is time consuming. You can get a back-of-the-envelope estimate using this easy calculator.
CLV can be calculated historically, over specific time periods, or it can be predictive. Each of these calculations serve different purposes. But, predictive CLV is the most powerful way to not only understand what a customer is worth to you now, but also how their value will change overtime.
Let’s look at an example of this for the ecommerce industry. The chart below shows CLV benchmark data from nearly 200 ecommerce companies. In this chart we’re looking at the most basic form of CLV. It has a single input, sum of all purchases, and closed time parameters, 365 days.
On day one, customers with the highest lifetime values have already distinguished themselves. This means marketers don’t need to wait long to make important invest-or-kill decisions about their marketing campaigns. CLV is the best metric to predict future customer behaviors.
Improving your Customer Lifetime Value can have a dramatic impact throughout your business. Let’s see how your estimate would change if you improved the underlying assumptions.
This chart shows how changes in your repeat purchase rate would impact your Customer Lifetime Value.