What is Customer Lifetime Value?
Customer Lifetime Value is the total worth of the customer over their customer journey. It is an essential metric for tracking your customer experience as it can tell how valuable a customer is to your company. Acquiring new customers is usually more costly than retaining customers, so increasing your existing customers' value is a great way to drive business growth.
How Do You Measure CLV?
The most straightforward formula for measuring CLV is to add the total revenue earned from a customer over their lifespan and subtract this figure from the initial cost of acquiring them:
(Annual Customer Revenue Generated) X (The Duration of Customer Relationship) - Total Costs of Acquiring and Serving the Customer = CLV
However, there are more complex measurements you can add to your equation, for example:
- Identify all your company's customer touch-points where your customer creates value
- Integrate the goals that your customers want to achieve in your customer record
- Measure the revenue that your customer generates at each touch-point
- Average the years spent by the customer and add together all of the data to calculate the customer lifespan
The Difference Between CAC and CLV
CLV goes hand in hand with another vital metric – CAC (Customer Acquisition Cost). Let's quickly discuss the relationships between the two metrics.
Customer Acquisition Cost
CAC is the process of converting a prospect into your customer through both online and offline methods. This includes the cost that your business spends over various social media platforms, your website, as well as billboards, flyers, and other offline marketing methods.
Customer Lifetime Value
On the other hand, customer lifetime value is the revenue generated by a customer minus the expenses incurred to acquire them. So while CAC lets businesses know how well they are doing with their customers, it doesn't tell the whole story. If you want to know how many existing customers can be retained over the long term, you'll need CLV.
For example, if your product is subscription-based, you can track your customers and maintain that subscription. Similarly, if you have multiple product offerings, you can diversify your existing customers into some of your other offerings. In essence, CLV will provide you with information about how much value the customer generates for your business over its lifetime with you.
Fast fact: A 1:1 ratio of CLV: CAC represents that your business is not making a significant profit. An ideal CLV:CAC ratio is 3:1 and indicates that your business is doing well at customer retention, customer upselling, and customer diversification.
Both CAC and CLV can provide valuable information about your customer relationships. While CLV gives more detailed insights into the profits you're making from each customer, you cannot know your CLV unless you know how much it costs to acquire a customer.
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