Customer Lifetime Value (CLV): how to calculate and optimize customer value

Customer Lifetime Value (CLV): how to calculate and optimize customer value
Articles and interesting facts

In today's competitive era, customer value (CLV) is becoming a critical metric for many companies. Understanding CLV and optimizing it can be critical factors in your company's long-term success. Customer Relationship Management (CRM) systems play a key role in this process. This article will give you a detailed look at how to calculate and optimize CLV as part of your marketing strategy.

In today's competitive era, customer value (CLV) is becoming a critical metric for many companies. Understanding CLV and optimizing it can be critical factors in your company's long-term success. Customer Relationship Management (CRM) systems play a key role in this process. This article will give you a detailed look at how to calculate and optimize CLV as part of your marketing strategy.

What is Customer Lifetime Value?

Customer Lifetime Value (CLV) is the predicted revenue a customer can bring to your business over the lifetime they are with you. It expresses how much value a returning and repeat customer is to you, a customer with whom you have established a long-term relationship. This metric is a key part of marketing strategies because it helps businesses understand how much they can invest in acquiring new customers and retaining existing ones.

Customer Lifetime Value marketing relies on the calculation and analysis of CLV, which is a metric that assesses the total revenue and profit value that a customer generates for a business over their lifetime.

How to calculate CLV?

For larger business plans and in the case of large companies, the question of calculating CLV is usually entrusted to experts. The sheer complexity of the process is outlined on its website by, for example, the global network of financial and other consultants Deloitte. It is worth noting that even an approximate CLV calculation can provide your company with valuable guidance and highlight the benefits of its implementation.

How to do a simple CLV calculation to find the lower bound estimate?

CLV = (turnover / number of clients) × 3*
* Clients will stay with us for about 3 years.

Customer Lifetime Value marketing

CLV is a critical metric for any firm's marketing strategy. When firms are aware of the value that customers bring over their life cycle, it allows them to allocate their marketing resources effectively. They can then focus on strategies that maximize that value. Customer Lifetime Value marketing seeks to increase the value of individual customers through personalised and targeted campaigns that increase customer satisfaction and loyalty.

This approach can lead to more effective marketing investments and longer, more profitable customer relationships. That's why CLV is not only a measure of current customer value, but also a strategic tool for building strong and lasting relationships. Calculating Customer Lifetime Value can be done in several different ways depending on the specific information you have available:

1. Basic calculation: Customer Lifetime Value model

The simplest way to calculate CLV is by multiplying the average purchase value, average purchase frequency, and average customer relationship length. This approach is good for a quick estimate, but may not include many important factors such as customer acquisition and retention costs.

Base CLV = (sales per year * margin) / number of years the customer has been buying from us

2. Historical Customer Lifetime Value model

The historical CLV model uses historical customer behavior data to predict future spending. This approach is often used to segment customers based on past spending.

Historical CLV = average purchase value × average purchase frequency × average customer relationship length

3. Predictive Customer Lifetime Value model

Predictive CLV is the most sophisticated method and uses advanced statistical analysis and machine learning to predict future customer behavior based on historical data. This approach is best suited for large organizations that have large amounts of customer data.

Predictive CLV = average purchase value × average purchase frequency × average customer relationship length × profit margin

Customer behaviour and market conditions: key factors for CLV marketing

The exact model for calculating CLV can be very specific to your business and can evolve over time as customer behavior and market conditions change. However, you should remember that the true value of a customer to your business can be influenced by a number of other factors including:

  •     customer acquisition and retention costs,
  •     the likelihood of customer churn,
  •     the growth or decline in customer sales over time
  •     and many others.

1. Customer acquisition and retention costs

The calculation of CLV must take into account the costs that the firm incurs to acquire and retain customers. This may include marketing investment, sales costs, customer service costs and others. Higher costs of acquiring a new customer may reduce CLV, while lower costs of retaining existing customers may help to increase it.

2. Probability of customer churn

CLV must take into account the probability of customer churn. Customers may terminate their relationship with a firm for a variety of reasons, whether because of competing offers, unsatisfactory customer service, or a change in their preferences. Reducing the customer churn rate can have a positive effect on CLV.

3. Growth or decline in customer sales over time

CLV must include a prediction of the growth or decline of each customer's sales over their lifetime. Customers may tend to buy more or less over time. For example, if their loyalty increases and they become more frequent and larger customers, their CLV increases. Conversely, if their purchase activity decreases, this can have a negative impact on CLV.

4. Other factors

In addition to the above factors, there are other variables that can affect CLV. These include changes in the economic environment, the competitive environment, changes in customer trends and preferences, technological advances and many more.

As CLV is a dynamic indicator, it is important to regularly update and adapt Customer Lifetime Value calculation models to reflect changes in customer behaviour and market conditions. This flexibility allows companies to better understand and leverage CLV as a strategic tool for long-term success.

CLV Update: Uncovering the drivers of Customer Lifetime Value

Therefore, regularly updating and adapting Customer Lifetime Value models allows a firm to capture current trends and provides insight into what factors are influencing Customer Lifetime Value. This allows the company to adapt its marketing strategies and activities to best respond to customer needs and preferences and ensure long-term customer loyalty and high customer value.

How to avoid common mistakes when using CLV

As we mentioned earlier, customer lifetime value is a key metric that can provide deep insight into a company's future performance. However, using this metric requires fine balancing and caution to avoid several common mistakes that can lead to ineffective decision-making and unnecessary resource expenditure. The following points discuss these mistakes in more detail and provide guidance on how to avoid them when using CLV marketing in your business.

  •    Zero segmentation

It's great to increase the overall customer lifetime value for all your customers, but this strategy is not the most effective. Putting more money into low CLV customers through generic marketing is not the optimal approach. Instead, focus on high CLV customers. The ideal strategy is to focus on increasing CLV among these high-value customers, who are likely to spend more on your products and services based on the data available.

  •     Incorrect segmentation

Incorrect segmentation can lead to a waste of valuable company resources. The problem can be under-utilization of available data. Proper segmentation should be supported by relevant and quality data. If outdated or incomplete information is used, valuable customers may be misidentified or their CLV may be overestimated. Adequate data analysis and updating are key to accurate CLV calculation and successful segmentation.

  •     Targeting unrealistic CLV

Targeting an unrealistic customer lifetime value (CLV) can be a risky and ineffective strategy. It is important to have a realistic view of each customer's value potential. Overemphasizing an unrealistically high CLV can lead to poor decisions and investing significant resources in a group of customers who cannot actually achieve that value.


CRM systems from Algotech: A key factor for increasing customer value

Algotech is a leader in the supply of comprehensive telecommunications and information solutions. It takes care of corporate data security and provides cloud and GDPR services. It develops, implements and supports customer relationship management (CRM) and decision support systems. These solutions can play a key role in increasing customer lifetime value (CLV). Here are some ways CRM systems can help:

  • Central databases: CRM systems allow for centralized storage of all customer information, including customer demographics, purchase histories, preferences, and interactions. This creates a single source of truth about customers, allowing for better tracking of their needs and behaviors.
  • Customer segmentation: CRM allows businesses to segment their customers based on various criteria such as age, gender, geographic location, purchase history and more. This helps businesses better understand each segment of their customer base and provide them with customized products and services. Personalization then improves the customer experience and increases the likelihood of a successful sale.
  • Predictive analysis: Some advanced CRM systems can use artificial intelligence and machine learning algorithms to predict future customer behavior based on past behavior. This can help businesses predict which products or services their customers might want in the future and adjust their marketing campaigns and strategies accordingly.
  • Improving customer service: CRM systems can also help businesses improve customer service by giving employees access to a complete history of customer interactions. This can help employees better respond to customer inquiries and complaints and provide consistent and personalized service.
  • Personalisation of marketing campaigns: CRM systems provide information about customer preferences and behaviour, which allows for the personalisation of marketing campaigns. Personalisation is a key factor in building customer loyalty and extending the customer lifecycle. CRM systems allow you to more accurately target and reach customers based on their individual preferences, leading to increased sales and CLV growth.

The combination of CRM systems and CLV therefore enables companies to better understand customer needs, personalize their marketing activities, increase customer loyalty and maximize customer life cycle value.

Results and competitive advantage: synergy between CRM systems and CLV

The combination of CRM systems and Customer Lifetime Value models delivers measurable results and competitive advantage to companies. This connection allows them to gain a deeper understanding of customer needs, which is the basis for personalizing marketing strategies and improving customer service. Through the effective use of CRM systems, high-value customers can be identified who bring in more revenue and have the potential for a long-term relationship with the company. This ultimately leads to increased customer lifecycle value and long-term business success. The link between CRM systems and CLV is therefore not only real, but also delivers measurable results and competitive advantages for companies.

CRM systems from Algotech: A key step towards long-term success

Our service offering includes CRM systems that play a key role in increasing customer lifetime value. Central databases, customer segmentation, predictive analytics, improving customer service and personalizing marketing campaigns are just some of the ways CRM systems help.

If you're looking for a reliable and effective solution for managing customer relationships and maximizing customer lifecycle value, contact us for our comprehensive CRM systems. You'll get a strategic tool to help you build strong and lasting customer relationships and achieve long-term success in your business.

Unleash the full potential of your IT today
By selecting "Submit" I acknowledge the personal data processing policy.

Related articles

We will find a solution for you too

Contact us

Interested in trying our services or a consultation? Leave us your contact details and we will get back to you within 3 hours.
- We will get back to you within 3 hours
- Non-stop support in English and Czech
- You have a preliminary offer within a week
- 99.99% data availability guarantee
Call us
You don't want to wait for an answer?
Call us at
+420 225 006 555
By selecting "Submit" I acknowledge the personal data processing policy.