The Customer Lifetime Value (CLV) is an important business key figure and describes the value a customer has for a company. It refers to both past and future revenues that the customer provides for the company. In (online) marketing, CLV is an important KPI because it is the basis of a marketing strategy that focuses on long-term customer relationships and a good customer experience.
The CLV helps to ensure that budgets and resources are used correctly, as it shows whether a customer relationship is profitable and whether the investment in the customer will continue to pay off. After all, it’s not profitable to spend a lot of money just to acquire a new customer, who doesn’t generate revenue.
The CLV can be calculated using various methods – the complexity of the calculation differs. For example, the CLV can be calculated using the following key figures:
- The duration of the business relationship with the customer (T)
- The customer’s expected revenues over the business period (eT)
- Expected expenses for the company (aT)
- The calculation interest rate to be applied (i = 1/T)
Max Mustermann has been a customer of a hairdressing salon for 8 years and gets his haircut five times a year for 30€. It is assumed that the customer will remain a customer for another 2 years under the same conditions (after that, possibly a change of residence). As a loyal regular customer, he will receive a tube of hair wax for 5€ every time. The additional time invested in the customer as well as proportional electricity and rental costs are set at 10€ per customer visit.
From this results:
- T = 10 years
- eT = 5 * 30€ = 150€ (5 visits per year * 30€ per visit)
- aT = 5 * 15€ = 75€ (5 visits per year * 15€ per visit)
- i = 1/10 = 0,1
The CLV is now calculated as follows:
CLV = T * (eT – aT/ (1 + i)*T) = 681,82€
The CLV is therefore 681.82€. Using this key figure, the operator of the hairdressing salon can estimate, for example, how high the investment in this customer may be without losing business.
In e-commerce, it is particularly important to have a clear tracking system that can assign a customer’s sales to exactly that customer. In order to work in compliance with data protection, the purchase history and other values must always be processed anonymously.
Since the CLV is partly based on estimated values (future sales), in reality this turn out to be smaller or larger than expected. Nevertheless, it is an important approximate value for optimizing budget planning for marketing campaigns.