What is customer lifetime value (CLV) and how to increase it?

Customer Lifetime Value (CLV) is a metric that estimates the total financial value of a customer to a company over the life of their relationship. It expresses the amount of money that a company receives on average from a customer from the first purchase to the moment the customer stops using its services or product. CLV is one of the key indicators of a successful business, although it is often underestimated. With CLV, we can better manage marketing campaigns, optimise customer service and decide which products or services to offer to best meet customer needs.

CLV is calculated using the following formula:

CLV = average order value x purchase frequency rate x average customer lifetime

Example: If a customer spends an average of 500 crowns on each purchase, buys three times a year and has an average relationship with the company for four years, the CLV for this customer would be 6 000 crowns. 

Why is CLV important?

Having visibility into CLV is key to effectively allocating marketing and sales resources. Companies that truly understand the value of their customers are better able to invest resources in strategies aimed at retaining existing customers instead of constantly searching for new ones.Higher CLV also contributes to the long-term value of the company, which is attractive to investors.

CLV brings significant benefits:

• Better allocation of acquisition costs: If we know the value that a customer brings, we can more easily decide how much it is profitable to invest in acquiring them.
• Building loyalty: Focusing on CLV growth leads to the creation of long-term, high-quality customer relationships, which in turn strengthens customer loyalty.
• Stable growth: higher CLV brings more stability to the company and long-term security for the future.

How to increase CLV?

Increasing customer lifetime value (CLV) cannot be achieved in one step. It is a combination of strategies aimed at customer retention and increasing the average value of each purchase. Below are some best practices that can help effectively.

1. Improve customer service: Customer service is key to customer satisfaction and loyalty. Quick responses, helpful staff, and easy availability of solutions promote a positive experience. So consider regular satisfaction surveys and team training to improve service.
2. Personalise offers and communication: Customers appreciate a personalised approach that reflects their needs. Use their purchase data to offer products or services that appeal to them - for example, through tailored emails or recommendations based on purchase history.
3. Introduce a loyalty points programme: Loyalty programmes motivate customers to make repeat purchases by offering points redeemable for discounts or rewards for orders. This increases CLV and strengthens the customer's relationship with the brand.
4. Up-selling and cross-selling: These techniques increase order value by offering customers premium or complementary products. For example, when selling electronics, you can offer accessories or extended warranties to maximise the profit from the purchase.
5. Retargeting: Reminding customers of repeat purchase opportunities through emails, social media and ads. Reach out to customers who have already purchased, offering them a new product or a discount.
6. Providing added value: Providing added value such as tutorials, exclusive offers or community space that builds customer trust and loyalty. Companies that offer more than just products achieve higher CLV.

Conclusion

Customer lifetime value (CLV) is a metric that underscores the importance of long-term customer care and satisfaction. Increasing CLV allows a company to grow more steadily and use resources more efficiently. Investing in customer service, personalization, loyalty programs and other proven strategies can significantly increase this value and help a company succeed in a competitive environment.

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