Customer lifetime value (CLV)

Many of the world’s most successful businesses have risen to the top because they understand the importance of increasing customer lifetime value (CLV), or the total value they can expect from a single customer over their lifespan.

To calculate CLV, there are basically two models that companies use based on their brand strategy, customer care policies, and other specific contexts of their business:

The formulas for measuring CLV vary too. However, these formulas usually focus on either average transaction size or gross margin of a typical customer. In this post, we see how a CLV calculation model is built around gross margin:

There are many benefits for businesses that shift from a short-term focus on quarterly profits to a long-term approach that prioritizes building enduring relationships with their customers. 

The rising cost of advertising and other customer acquisition measures have nudged many brands toward focusing more on the quality of their customer service and brand messaging.

When a company is less focused on increasing CLV, it will have a hard time growing its profits. In addition to helping a company with its profitability factor, the improvement of CLV ensures that the business: 

Brand loyalty research shows that when a company achieves a 7% increase in brand loyalty, the customer lifetime value of each client can rise by 85%. Not only do loyal customers bring long-term value to a company, but also they decrease the cost it has to pay to attract new customers. 

If implemented properly, a loyalty program can maximize customer satisfaction, leading to significantly higher CLV rates. 

Generally, loyalty programs help a business increase its CLV in two ways:

Investment in quality loyalty programs will help a business reduce its customer acquisition cost (CAC) while nurturing its existing customers.