Customer Lifetime Value (CLV): optimising customer value with a CRM
Mon Projet CRM - 13 septembre 2024
Customer Lifetime Value (CLV) represents the total revenue a customer is likely to generate for a business throughout the entire duration of their relationship. It is a particularly useful metric for SMEs and mid-market companies whose growth relies as much on retention as it does on acquisition. When calculated accurately, CLV allows for better decision-making between acquisition and retention budgets, the prioritisation of specific segments, and the measurement of the impact of customer relationship initiatives. The CRM is the natural tool for tracking it, as it centralises the history of every customer. This article explains how to define, calculate, and leverage CLV.
What is Customer Lifetime Value?
CLV is the estimated total profit a customer generates throughout their entire relationship with a company. It factors in average transaction value, purchase frequency, and estimated customer lifespan.
The higher the CLV, the more profitable it is to invest in acquisition and retention. CLV therefore acts as a compass for allocating marketing and sales efforts.
How to calculate it simply
A frequently used basic formula:
- CLV = average order value × annual purchase frequency × average customer lifespan.
- A more refined version: replace average order value with average margin per order to focus on profitability rather than revenue.
- For subscriptions: CLV = monthly ARPU × average subscription duration, potentially minus the cost of service.
The goal isn't absolute precision: it's about having a consistent and shared vision to compare segments and track trends.
Levers for optimising CLV
Several levers can increase CLV using a CRM:
- Improving retention: detecting and swiftly addressing churn signals.
- Increasing purchase frequency: reactivation scenarios, loyalty programmes.
- Increasing average order value: personalised recommendations, cross-selling.
- Improving the experience: reducing response times, streamlining journeys, personalising communication.
- Better targeting for acquisition: prioritising segments with the highest historical CLV.
Using CLV in day-to-day operations
CLV is only valuable if it informs decisions. For instance, you can compare CLV to Customer Acquisition Cost (CAC) to verify channel profitability, or segment customers by CLV to tailor customer service efforts.
Within a CRM, display CLV or a potential score directly on the customer record to help teams prioritise their actions.
Common mistakes to avoid
A few classic pitfalls:
- Calculating CLV on a sample size too short to be representative.
- Confusing revenue with margin: a high revenue-based CLV can hide low profitability.
- Never comparing CLV with acquisition costs.
- Using CLV solely as a marketing metric with no operational impact.
- Neglecting low-CLV segments that may contribute to brand image or volume.
Questions to ask yourself
Questions to help structure your CLV approach:
- Do we have a shared definition of CLV across the company?
- Are we able to calculate it by segment using our CRM?
- Do we compare CLV to acquisition costs to steer our investments?
- Does CLV actually influence our marketing and sales decisions?
- Do field teams have access to a value indicator on the customer record?
Taking it further
CLV is closely linked to retention, customer engagement, and acquisition costs. To dive deeper, explore our articles on loyalty, customer engagement, and customer acquisition cost (CAC).
Key takeaways
- CLV measures the total value a customer is expected to generate throughout their relationship with the company.
- A simple formula is enough to get started: average order value × frequency × lifespan.
- It serves as a compass for balancing acquisition and retention.
- Optimisation levers include retention, frequency, average order value, and customer experience.
- CLV is only valuable if it concretely influences operational decisions.
Want to go further?
Discover our tools, checklists and templates to apply these recommendations immediately.