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Understanding Customer Lifetime Value: Who Will Be Your Best Customers Over Time?

Every customer is important to your business, but there are some who will bring more long-term benefits than others. If you can identify these customers, you can target your marketing appropriately and ensure further purchases and brand loyalty. A key metric called customer lifetime value can indicate overall marketing success and help you determine who is likely to be your best customers over time.

What Is Customer Lifetime Value?

Customer lifetime value, also known as CLV or customer LTV, is a measure of how beneficial a typical customer will be to your business over the lifetime of their relationship with the company. In other words, the CLV indicates how much money the company can expect to earn from them.

How to Calculate CLV

Different companies may define customer lifetime value in slightly different ways, but the most basic and common calculation is CLV = average customer value x average customer lifespan.

  • Average customer value is the average amount spent per purchase multiplied by the average number of purchases in a year. 
  • Average customer lifespan is the average number of years a customer actively purchases from a company.

Here’s an example CLV calculation: 

  • A company’s customers spend an average of $50 per purchase and make an average of 5 purchases per year. Their average customer lifespan is 10 years.
    • Average customer value = $50 x 5 = $250
    • Customer lifetime value = $250 x 10 = $2500

Customer lifetime value can be calculated for any set or subset of customers, depending on what you want to know. You can compare and contrast different groups’ CLVs to get a better picture of who your primary customer base really is.

Why CLV Is an Important Metric

Customer lifetime value is more than just a number; it’s a useful barometer that can help companies make major business decisions and allocate resources appropriately. Here are just a few reasons why calculating CLV is so important.

It Identifies Your Best Customers

By calculating the CLV for different market segments, you’ll be able to see exactly which groups of customers offer the highest lifetime value. You can then reallocate resources to grow and/or retain those segments as needed.

It Reveals Areas for Improvement

On the opposite side of the coin, CLV can also identify the market segments that are the weakest. You can then alter your marketing strategies to improve results or stop targeting certain customer demographics altogether. 

It Makes Profitability Forecasting Easier

When you know how much you’re likely to earn from customers over time, you can make better predictions about future profits. If you can anticipate growth and know where to invest your funds, you can be more confident that you’ll see strong returns.

It Allows for Informed Budgeting

Just as you’ll be able to anticipate future profits, you can anticipate how much you’ll be able to spend. If the CLV has been dropping, for example, you may decide to shrink or reallocate the budget. You’ll also have a better idea of when to put resources into attracting new customers and when to focus on customer retention.

The Benefits of Improving Customer Lifetime Value

With increasing customer lifetime value comes increased overall business success. The following are just a few ways tracking and improving CLV can benefit your company.

Higher Revenues

The higher the customer lifetime value, the more your company stands to make from those customers overall. Focus on improving the factors that go into the CLV calculation and you’ll see bigger earnings in the end.

Lower Marketing Costs

In general, it costs less to keep the customers you have than to draw in new customers. When you’re able to keep your existing customers longer, you won’t have to spend as much on new customer acquisition. You’ll also be able to reduce ad waste by better focusing on those customers you know will respond.

Increased Organic Brand Promotion

Loyal existing customers become natural promoters. The longer they remain a customer and the more they spend, the more likely they are to recommend your products and/or services to others.

Long-Term Stability and Customer Retention

The stronger the relationship between your company and your customers, the more likely they are to support your business in the future. A strong customer lifetime value predicts continued brand loyalty, which can become advocacy later on in the customer journey.

AdBeacon: Your Reporting Solution for Effective Decision Making

With reliable data and insights from AdBeacon, you can take informed actions to improve customer lifetime value and boost your business. On average, companies who use AdBeacon see 5 times more revenue, 40% less ad waste, and 15-30% overall business growth. 

To learn how our first-party data tracking software can help you make more informed, effective business decisions, schedule a free platform demo today. For further information, contact us online or call us toll free at (877) 504-8668.