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Glossary

What is Customer Lifetime Value?

Customer lifetime value (CLV) is a key measurement to monitor as part of a customer experience programme. CLV is a measure of how important a client is to your firm, not only on a purchase-by-purchase basis, but throughout the course of the whole relationship. The overall worth of a client to a firm over the course of their relationship is referred to as customer lifetime value. It's a significant statistic since it's less expensive to maintain existing customers than it is to recruit new ones, so boosting the value of your existing customers is a fantastic strategy to drive growth.


What is the significance of client lifetime value in your business?


Finally, you don't need to get mired down in intricate mathematics; simply consider the value that a client gives over the course of their engagement with you. You may begin to identify the major drivers of CLV by studying the customer experience and measuring feedback at all important touchpoints.


When you have a multi-year engagement with a consumer, such as with a paid TV subscription or a mobile phone contract, CLV is an excellent measure to employ. It's also useful for detecting early symptoms of attrition, such as when spending drops down after the first year as subscribers utilize the service less and less.


What does it cost you to have customers?


CLV is closely related to another critical measure - CAC (customer acquisition cost). That is the money you spend to acquire a new consumer, which includes advertising, marketing, special offers, and so on. Customer lifetime value is only meaningful if the CAC is also considered. For example, if the CLV of an average coffee shop client is $1,000 and it costs more than £1,000 to recruit them (through advertising, marketing, deals, etc.), the coffee chain may be losing money until it reduces its acquisition expenses. Another item to keep an eye on is the cost of that consumer to your company.


The cost to serve is another element to consider. This is a portion of the cost of doing business, and it includes everything you do to get the product or service into the hands of the client and performing what they need it to accomplish. For example, logistics, overheads at your actual site, contact centre fees, and so on. Breaking this down by customer will help you understand these expenses at a granular level and go into aspects such as whether your high CLV customers cost the same as your low CLV customers and whether some customers are more expensive than others. If the cost of serving a current client becomes prohibitively expensive, you may be losing money despite their seeming high CLV.


In contrast to client acquisition, which is a one-time investment, the cost to service may change throughout the course of the customer's lifetime. To return to our paid TV subscription, your cost to serve may be greater in the first year of a contract but will gradually decrease as the consumer continues with you for a longer period of time. As a result, if your renewal rates fall, your average cost to service is likely to climb, resulting in a loss in profitability.


Knowing these figures over time and being able to compare them is the only way to have a meaningful understanding not just of what drives customer expenditure and loyalty, but also of what it delivers back to the business's bottom line.


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