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Customer Lifecycle Value
Customer lifecycle value (CLV), also known as customer lifetime value (CLTV) is an important predictor of how valuable a customer will be to a company’s net profit. When a company measures the CLV, that value can be a deciding factor in whether or not to expend the marketing budget to market directly to specific individuals within the customer base.
If the CLV is low, a company may want to reallocate marketing efforts to various customer retention programs that will enhance customer experience and motivate the individuals to purchase products or services again.
How to Measure Customer Lifecycle Value (CLV)
A company can calculate the customer lifecycle value by ascertaining the historic CLV and the predictive CLV. The former is calculated by adding the total amount of gross profit a company has made from a specific customer.
The latter is calculated by using a predictive analysis that evaluates a customer’s transaction history combined with certain indicators of behavior that can predict their value as a lifetime customer. As the customer makes new purchases, the company’s predictive analysis becomes more precise.
How CLV Is Calculated
The traditional formula for calculating lifecycle values will give you a precise CLV. The basic formula is as follows:
- CLV = (Average Order Value x Regularity of Purchases) x (Average Retention Time)
Several variables are required to calculate the customer lifecycle value, which includes the following:
- Average Retention Time: This value represents the average lifespan of an individual customer.
- Average Order Value: When calculating this value, use a constant time variable such as the period of a year. Divide the total revenue during the year by the number of orders purchased in the year.
- Regularity of Purchases: Measuring this value during the period of a year is more feasible for most businesses, rather than calculating weekly purchases according to the traditional CLV formula. Many companies do not get repeat customers every week. To determine the regularity of purchases, divide the total orders during the year by the annual unique customers.
- Individual Value of Customer: To measure this value, take the average order value and multiply that by the customer’s regularity of purchases.
How Companies Manage Customer Lifecycle
When a company uses customer lifecycle management (CLM) correctly, it can become an invaluable resource to impact its profitability margin in a significant way.
- Analytics: Companies can manage the customer lifecycle by implementing a comprehensive analytics program that integrates contrasting customer data into one source to help them optimize the CLV for increased profitability.
- Loyalty: Companies can maximize the potential of their customer loyalty programs.
- Identity: Gaining a deeper understanding of who their customers are and what their CLV is will enable companies to create the most effective programs to motivate continued patronage.
- Personalization: Enhancing the customer experience through one-to-one relationship marketing is an important factor in personalizing interactions with customers.
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Contact Selligent today for more information on how to identify and maximize customer lifecycle value.