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In Business, What Is CLV?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 17 October 2014
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Customer lifetime value (CLV) refers to the value a relationship with a customer has for a company in the long term, looking at how much money customers will spend over the duration of their relationship with the company. There are a number of formulas that can be used to calculate CLV. Companies interested in developing a long-term marketing plan may use this metric in their planning for marketing campaigns and development of customer policies.

By thinking about the relationship with customers over time, companies think about the long term. Cultivating loyal customers that will stay with a company or come back to it for repeat business is beneficial for a company, as it ensures that they retain a large customer base. Loyal customers will also lead to referrals for new customers. This will expand the company's customer base and help the company expand, offer more products and service, and develop.

When calculating CLV, companies think about how much a customer is likely to spend with the company over time, given current buying patterns, the industry the company is in, and other factors. For companies that offer services and products on a subscription basis, this calculation can be straightforward. In cases where customers buy in spurts or when things are needed, it can be a bit more challenging to project spending over the life of the company.

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Companies can look at CLV over demographics and also for specific customers for the purpose of identifying the customers of most value to the company. The overall CLV is also an important consideration when it comes to budgeting. Companies must think about how much they are willing to spend in order to attract and keep customers. If a company has to expend a lot of money to appeal to a customer through advertising, promotions, and other techniques, the spending may not balance out with the customer's lifetime value, making it a poor use of the company's budget.

Marketing consultants and the members of marketing departments have a number of tools they can use to estimate CLV and to make other predictions and calculations about customers. This data can be applied to the development of long-term marketing plans, as well as the implementation of policy. Policies can range from training employees to offer incentives to people who are considering canceling or suspending their subscriptions to mandating that employees follow a set series of steps when they encounter customer complaints.

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allenJo
Post 3

@MrMoody - Yes, you have to look at it from the customer’s point of view too. With so many choices at their disposal, the notion of brand or company loyalty has become an almost archaic concept.

So what that means is that the companies must continually “sell” to their customer base, to reinforce the value proposition that they offer, and also provide some additional value added perks as well.

MrMoody
Post 2

@robbie32 - I agree. I’ve often heard that it takes more effort to win a new customer than it does to keep a customer that you have.

I don’t have the numbers handy, but there’s a certain ratio that describes the difference between the two approaches. Smart companies are always working hard to keep their current customers happy in my opinion.

Unfortunately, some industries are a bit more demanding in that regard. Take cell phones – or the entire telecommunications industry for that matter.

The rate of churn among those customers is very high, with the cut-throat rates offered on phone calls by competing provides, and even alternative technologies like Voice Over Internet Protocol, which enable you to make calls for free.

Calculating customer lifetime value in those industries is a tricky proposition indeed.

robbie21
Post 1

I like this concept. As a consumer, I feel like it help you distinguish between companies that are really interested in building a relationship and those that just want to take you for a ride.

I feel like wise companies will realize that good customer service is always going to increase your CLV. Even if you can't make a person happy enough that they ever buy from you again, you can at least reduce the number of times they tell the story about how you screwed them over!

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