It is important for any business to have positive customer experiences to keep clients purchasing. In order to do that companies need to gain their trust and loyalty.
Customer loyalty is when the customer and the business have a continuous positive relationship. If clients keep buying again and again, this means that you are doing the right things in your business. You won their trust and they will choose your company over a competitor that offers similar products. To understand how well the product affects the auditory there is a metric called Customer lifetime value (CLV).
What is a customer lifetime value (CLV)?
Customer Lifetime Value (CLV or CLTV) is the total revenue a business will receive from a single customer over the lifetime of their relationship. The longer the customer continues to buy from the company, the greater this revenue becomes.
Why is customer lifetime value important?
As mentioned earlier in the article, CLV not only shows the value a company can expect from individual transactions but also across their entire relationship, calculating the specific revenue from each customer. With that said, increased CLV will lead to increased revenue over time.
Also, CLV helps you understand how the product affects your consumers and which areas need improvement. By looking at your customer’s feedback and behavior you can change your product to their needs and strengthen their loyalty.
This will help you differentiate your company from the competitors.
In order to measure customer lifetime value, companies use two main models.
What are the CLV models?
There are two CLV modules and these are predictive CLV and historical CLV module. Each one of them leads to different results.
This depends on whether a business wants to understand the future behavior of its customers or whether to look at existing data.
What is a predictive customer lifetime value module?
By using regression or machine learning the predictive CLV model can predict the customer’s behavior. With this module, companies can better identify the product or service that brings in the most sales and identify the most valuable customers.
What is a historical customer lifetime value module?
The historical CLV module represents the amount of gross profit that the customer has made from all previous purchases.
This model looks at past data to predict the value of a consumer based on previous transactions alone. Without considering whether the customer will still purchase from the company or not.
How to calculate the customer’s lifetime value?
The customer lifetime value formula will tell you how much it’s worth investing in the customer experience in order to see a positive return on investment.
The formula used to calculate the CLV is as follows:
Customer lifetime value = customer value x average customer lifespan.
Customer value is the average purchase value multiplied by the average frequency rate.
You can get the average purchase value when dividing the total revenue over a set time frame and the total number of purchases over the same time frame.
The average frequency rate is obtained when the total number of purchases over a period is divided by the total number of customers during that same period.
And the average customer lifespan is the average number of years a customer stays active dividing by the total number of customers.
