{"id":60333,"date":"2018-07-30T05:32:52","date_gmt":"2018-07-30T12:32:52","guid":{"rendered":"https:\/\/www.questionpro.com\/blog\/?p=60333"},"modified":"2023-08-10T07:03:51","modified_gmt":"2023-08-10T07:03:51","slug":"customer-lifetime-value-clv","status":"publish","type":"post","link":"https:\/\/www.questionpro.com\/blog\/customer-lifetime-value-clv\/","title":{"rendered":"Customer Lifetime Value (CLV): Definition, Formula, and Importance"},"content":{"rendered":"<h2><b>Customer Lifetime Value (CLV): Definition <\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Customer Lifetime Value (CLV) is defined as the present value of a customer has for a \u00a0brand or an organization because of the purchases they have made in the past or the predictable net profit associated with a customer, throughout their predictable life cycle of being associated with an organization or a brand. In other words, it is the value a business will derive from its customers during their association with a company.<\/span><\/p>\n<p style=\"text-align: center;\"><em><strong>LEARN ABOUT:<\/strong> <a href=\"https:\/\/www.questionpro.com\/blog\/customer-lifecycle\/\">Customer Lifecycle<\/a><\/em><\/p>\n<p><a href=\"https:\/\/www.questionpro.com\/blog\/what-is-market-research\/\"><span style=\"font-weight: 400;\">Market research<\/span><\/a><span style=\"font-weight: 400;\"> heavily relies on data. In this age of technology, most of the market researchers prefer to track everything, be it emails, social media, website visits, hits and clicks and even checkouts. There are some tools that might help measure the entire <\/span><a href=\"https:\/\/www.questionpro.com\/blog\/customer-journey-mapping-customer-experience\/\"><span style=\"font-weight: 400;\">customer journey <\/span><\/a><span style=\"font-weight: 400;\">to start to finish and estimate the value of each touchpoint in that journey. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">Customer Lifetime Value is an important metric as businesses would want to think about the overall market spending. CLV helps businesses make important decisions about different departments like- sales, marketing, product development and customer service and support. For example: <\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><b>Marketing:<\/b><span style=\"font-weight: 400;\"> What amount of money will be spent on acquiring a new customer?<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Product:<\/b><span style=\"font-weight: 400;\"> What changes in the product will best suit the need of the customers?<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Customer support:<\/b><span style=\"font-weight: 400;\"> How much money needs to be spent to acquire talented customer support staff, so they provide impeccable customer service?<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Sales:<\/b><span style=\"font-weight: 400;\"> What types of a customer should sales personnel spend the most time on trying to acquire?<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">CLV is a \u00a0fundamental metric business use to measure and evaluate their performance campaigns. CLV is a long-time indicator of business health. <\/span><span style=\"font-weight: 400;\">CLV is calculated based on purchases made by customers in the past and the prediction of purchases they will make in the future. Let us understand the concept of historic CLV and predictive CLV.<\/span><\/p>\n<p style=\"text-align: center;\"><span style=\"font-weight: 400;\">Learn more: <\/span><a href=\"https:\/\/www.questionpro.com\/market-research.html\"><span style=\"font-weight: 400;\">Market Research Surveys- The Complete Guide <\/span><\/a><\/p>\n<h3><b>Customer Lifetime Value (CLV) Formulas<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Customer Lifetime Value is calculated based on historical customer lifetime value and predictive customer lifetime value. The historic method analyzes the <a href=\"https:\/\/www.questionpro.com\/blog\/data-collection\/\">data collected<\/a> in the past and makes judgment on the value of a customer purely based on the past transactions. On the contrary, predictive method as the name suggests, predicts the value of customers on the predictions of the purchases that are going to make in future. In the following section, we will learn more about CLV formulas. <\/span><\/p>\n<p><b>Historic Customer Lifetime Value<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Historic CLV is the sum of gross profit from all the past purchases made by an individual customer. The sum of all gross profits is the value of the transactions. If you have access to all the past transaction made by your customers, historic customer lifetime value can be calculated using the following formula: \u00a0<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td>\n<p style=\"text-align: center; border: solid 1px #222; padding: 4px;\"><strong>Customer Lifetime Value (Historic)= (Transaction 1+ Transaction 2 + Transaction 3\u2026.+ Transaction N) X AGM<\/strong><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Where:<\/p>\n<p><b>N= <\/b><span style=\"font-weight: 400;\">Last Transaction made by the customer at your store<\/span><\/p>\n<p><b>AGM = <\/b><span style=\"font-weight: 400;\">Average Gross Margin<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Calculating CLV based on net profit gives a business the actual profit a customer is contributing to the business. Historic customer lifetime value takes into account <a href=\"https:\/\/www.questionpro.com\/blog\/customer-service\/\">customer service<\/a> cost, \u00a0cost of returns, acquisition cost, marketing cost etc. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">There is one downside to calculating historic CLV, it gets extremely complex to calculate it on an individual basis.<\/span><\/p>\n<p style=\"text-align: center;\">Learn more: <a href=\"https:\/\/www.questionpro.com\/survey-templates\/customer-satisfaction-surveys\/\">Customer Satisfaction Surveys<\/a><\/p>\n<p><b>Predictive Customer Lifetime Value <\/b><\/p>\n<p><span style=\"font-weight: 400;\">Predictive CLV is more accurate value, that is predicted through an algorithm based on predictions of purchases that will be made by a consumer i.e the total value a customer will eventually give to a business over their entire lifetime. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">In practice this can be a little difficult to achieve considering the fact there may be fluctuation in price, discounts offered etc. There are a number of ways of calculating predictive CLV that vary widely in complexity and accuracy.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Simple Predictive CLV can be calculated using the formula: <\/span><\/p>\n<table class=\"align-center\" style=\"height: 77px;\" width=\"801\">\n<tbody>\n<tr>\n<td>\n<p style=\"border: 1px solid #222222; padding: 4px; text-align: center;\"><b>\u00a0CLV= ((Tx AOV) AGM) ALT<\/b><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Where:<\/p>\n<p><b>T<\/b><span style=\"font-weight: 400;\"> = Average monthly transactions <\/span><\/p>\n<p style=\"text-align: left;\"><b>AOV<\/b><span style=\"font-weight: 400;\">= Average order value<\/span><\/p>\n<p style=\"text-align: center;\"><em><strong>LEARN ABOUT:<\/strong> <a href=\"https:\/\/www.questionpro.com\/blog\/average-order-value\/\">Average Order Value<\/a><\/em><\/p>\n<p style=\"text-align: left;\"><b>ALT<\/b><span style=\"font-weight: 400;\">= Average Customer Lifespan <\/span><\/p>\n<p style=\"text-align: left;\"><b>AGM<\/b><span style=\"font-weight: 400;\">= Average gross margin<\/span><\/p>\n<p style=\"text-align: center;\"><span style=\"font-weight: 400;\">This equation becomes gross margin contribution per customer lifespan (GML). Therefore, <\/span><\/p>\n<table class=\" aligncenter\" style=\"height: 35px;\" width=\"774\">\n<tbody>\n<tr>\n<td>\n<p style=\"border: 1px solid #222222; padding: 4px;\"><b>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 CLV= GML (R\/1+D-R)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0<\/b><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Where:<\/p>\n<p style=\"text-align: left;\"><b>R<\/b><span style=\"font-weight: 400;\"> = monthly retention rate <\/span><\/p>\n<p style=\"text-align: left;\"><b>D<\/b><span style=\"font-weight: 400;\"> = monthly discount rate<\/span><\/p>\n<p style=\"text-align: left;\"><span style=\"font-weight: 400;\">This model is a predictive model and may not the exact forecast. <\/span><\/p>\n<p style=\"text-align: left;\"><span style=\"font-weight: 400;\">It is essential for businesses to do these calculations to get a real-time understanding of how valuable the customer is to a business or a brand.<\/span><\/p>\n<p style=\"text-align: center;\">Learn more: <a href=\"https:\/\/www.questionpro.com\/blog\/viral-coefficient\/\">What is Viral Coefficient?<\/a><\/p>\n<h3 style=\"text-align: left;\"><b>Importance of Customer Lifetime Value (CLV)<\/b><\/h3>\n<p style=\"text-align: left;\"><span style=\"font-weight: 400;\">One cannot keep emphasizing enough the importance of customer lifetime value as it is one of the most important metrics for any business or brand. <\/span><a href=\"https:\/\/www.questionpro.com\/blog\/customer-churn\/\"><span style=\"font-weight: 400;\">Customer churn<\/span><\/a><span style=\"font-weight: 400;\"> is bad for any business. It is a known fact that acquiring new customers is costly than to retain existing ones. Thus to enhance<\/span><a href=\"https:\/\/www.questionpro.com\/blog\/build-customer-loyalty\/\"><span style=\"font-weight: 400;\"> customer retention strategy <\/span><\/a><span style=\"font-weight: 400;\">a business needs to keep calculating its CLV. Here are the five reasons why CLV is important in increasing profitability, retention and overall business success:<\/span><\/p>\n<ol style=\"text-align: left;\">\n<li><b>It predicts real-time ROI <\/b><\/li>\n<\/ol>\n<p style=\"text-align: left;\"><span style=\"font-weight: 400;\">CLV helps an organization or business focus on the channels that will bring in maximum returns through most profitable customers. Optimize your marketing channels to understand the net worth of the customer rather than knowing only about the first few purchases. You are, therefore, maximizing your customer lifetime value in relation to the cost of customer acquisition.<\/span><\/p>\n<p style=\"text-align: center;\">Learn more: <a href=\"https:\/\/www.questionpro.com\/blog\/acquire-reliable-customer-feedback\/\">Ways to Acquire Customer Feedback<\/a><\/p>\n<ol style=\"text-align: left;\" start=\"2\">\n<li><b> Helps enhance marketing retention strategy<\/b><\/li>\n<\/ol>\n<p style=\"text-align: left;\"><span style=\"font-weight: 400;\">The amount of money you spend on your marketing campaign should not be just valued on the instant revenue it generates. For example, a marketing campaign should not just focus on just converting your one-time purchasers into repeat customers but should also add value to the average CLV of the segment of customers you are targeting as a business.<\/span><\/p>\n<ol style=\"text-align: left;\" start=\"3\">\n<li><b> Create an effective message for the target audience<\/b><\/li>\n<\/ol>\n<p style=\"text-align: left;\"><span style=\"font-weight: 400;\">A business or an organization should know to segment their customers base by CLV so they can improve the relevance of the <a href=\"https:\/\/www.questionpro.com\/blog\/6-save-your-marketing-butt-strategies\/\">marketing strategy<\/a> to retain customers and reduce customer churn. An insightful way of doing this would be to segment your target audience and manufacture products to best suit their needs, this will send an effective message to your consumers and they will return repeatedly to make purchases.<\/span><\/p>\n<p style=\"text-align: center;\">Learn more: <a href=\"https:\/\/www.questionpro.com\/blog\/5-reasons-customer-satisfaction-survey-important\/\">Why are Customer Satisfaction Surveys important?<\/a><\/p>\n<ol style=\"text-align: left;\" start=\"4\">\n<li><b> Helps in understanding customer behavior <\/b><\/li>\n<\/ol>\n<p style=\"text-align: left;\"><span style=\"font-weight: 400;\">By organizing the data obtained from studying CLV, organizations can maintain a trait book to understand what triggered the first purchase. Once this analysis is done and results are obtained, similar triggers can be used with prospective clients or consumers in order to turn them into first time purchasers. \u00a0<\/span><\/p>\n<ol style=\"text-align: left;\" start=\"5\">\n<li><b> A better output from customer support<\/b><\/li>\n<\/ol>\n<p style=\"text-align: left;\"><span style=\"font-weight: 400;\">When consumers feel valued, that is when they keep coming back to the brand to make purchases. To achieve this a brand must provide exceptional customer service to its clients. Clients who think positively about a brand, speak positively of the brand, thus increasing the <\/span><a href=\"https:\/\/www.questionpro.com\/features\/net-promoter-score.html\"><span style=\"font-weight: 400;\">Net Promoter Score<\/span><\/a><span style=\"font-weight: 400;\">. These are the consumers who will not only purchase regularly from you but will recommend you to their friends and family. <\/span><\/p>\n<p style=\"text-align: center;\"><span style=\"font-weight: 400;\">Learn more: <\/span><a href=\"https:\/\/www.questionpro.com\/blog\/net-promoter-score-calculation\/\"><span style=\"font-weight: 400;\">Net Promoter Score Calculation- How it Works?<\/span><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Customer Lifetime Value (CLV): Definition Customer Lifetime Value (CLV) is defined as the present value of a customer has for [&hellip;]<\/p>\n","protected":false},"author":86,"featured_media":60337,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[203],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.4 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Customer Lifetime Value (CLV): Definition, Formula, and Importance | QuestionPro<\/title>\n<meta name=\"description\" content=\"Customer Lifetime Value (CLV) is defined as the present value of a customer has for a brand or an organization because of the purchases they have made in the past or the predictive value a customer might add during his\/her association with a business or company. 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