Customer lifetime value (CLV) is the total income a business can expect from one customer over time. Tracking this metric helps companies improve their customer experience and retention rate.
Detailed explanation
CLV indicates how much value – aka revenue – the average customer brings to your business during their relationship with your company. Learning how to calculate customer lifetime value helps you make appropriate budgeting, marketing and customer retention decisions. In fact, a positive CLV helps reduce customer acquisition costs, as earning new clients costs more than building and retaining a loyal customer base.
Let’s take a look at this CLV example. A customer signs up for a subscription service, such as a streaming platform. The company’s service costs about $15 per month, and the average user keeps the service for about three years. Here’s how the company will calculate its CLV.
$15 (product cost) x 12 (months in a year) x 3 (duration of customer relationship) = $540
So the streaming platform’s CLV is $540.