CLV (Customer Lifetime Value) is an indicator that determines the lifetime value of the customer. In practice, this ratio will help you calculate the estimated amount of revenue that a customer will generate during the relationship. Of course, this is not about the value of the customer’s life – it would be too complicated to calculate. Typically, a shorter and predetermined period is assumed in the CLV calculation – e.g. 12 or 24 months.
The first one, a bit simpler, assumes an estimation resulting from the already existing data on a particular relationship.
For example:
We know that the purchase value of a given customer’s basket is on average £50 per month. If we want to examine its value on a scale of 2 years, then we must make the following calculations:
CLV = 50 (£) x12 (months) x 2 (years)
CLV will be 1,200 in two years.
Another model for calculating the CLV index focuses on profit after deducting the entrepreneur’s costs (purchase or production costs). Using the already mentioned example, you can present it as follows:
CLV = 50 (£) x 12 (moths) – 17% (margin) x 2 (years)
In this case, the value of CLV will be £996.
It should be remembered that the values resulting from the use of the above methods are very general, which means they can be estimated inaccurately. In practice, the value of the CLV index is calculated in relation to data and assumptions individually tailored to the needs of a given company.
Calculating the value of the CLV indicator allows us to make the right business decisions. Thanks to the knowledge about the client’s lifetime value, we can estimate how much money we can invest in acquiring new customers and maintaining relationships with the existing ones. Thanks to this, we can more accurately estimate the maximum budget that we can spend in a given period of time for PPC advertising. However, let’s remember that when calculating the value of the CLV index, the customer groups must be segmented beforehand. This is especially important when the assortment of our online shop is very diverse.
