What is Customer Lifetime Value (CLTV)?
The customer lifetime value (CLV or CLTV) represents the total revenue a business can expect from a customer during the duration of their account. A metric that calculates the customer value to your company is a crucial part of the customer experience program.
Identifying the most valuable segments of customers is also possible through customer lifetime value calculation. Long-term customer value increases as a customer spend more on brand purchases.
For a deeper understanding, consider CLV as a metric to determine how much you are willing to invest in a customer to maintain that relationship. Consider if a customer's CLV is $1000, you will only support that amount in maintaining the connection with that customer since more than that would not be profitable.
How to calculate Customer Lifetime Value (CLTV)?
Measuring CLV is essential for companies looking to improve their customer experience.
A SaaS business can use the below formula to estimate CLV. It is also critical to consider other factors, such as account expansions (upgrades), contractions (downgrades), and churn patterns.
Depending on your customer purchases, you can use several models to calculate your CLV. Each model has its advantages and disadvantages.
Example: You have a customer for 12 months and charge $100 per month. As a result, their CLV would be $100 x 12 = $1,200.
In the SaaS industry, here is the formula for calculating CLV:
CLV = Average recurring revenue per user per month (ARPU) / Customer churn rate
You should measure CLV using ARPU and churn rate from the same period.
Here is a quick explanation of the formula:
ARPU: Currently, active user accounts generate an average revenue per user. Calculate it by dividing monthly recurring income by the total number of users.
Let us say you have 100 active users. Among them, 50 earn $50 yearly, while the other 50 earn $100. You have an ARPU of $75 per year.
Advantages of Calculating CLV
A customer retention and acquisition strategy based on CLV allows you to maximize customer interaction.
Below are some advantages of the customer lifetime value.
Cultivating brand loyalty:
Customer lifetime value comes from frequent contact, and it helps estimate customer churn. Customers who have a low CLV are more likely to abandon a brand.
Predicting profitability:
CLV measures a customer's approximate value to a business, making it helpful in gauging profitability. Higher CLV positively impacts your bottom line.
Long-term savings:
Acquiring customers now is often more expensive than retaining them later. It will help if you focus on increasing the customer retention rate to maximize the value of existing customers. So, you are avoiding the cost of replacing current customers with new ones.
Sustainable Approach:
By focusing on CLV, your company will become data-driven. You can proactively improve your customers' experiences throughout their lifetime if you invest in them for the long term.
Helps To Segment Demographics:
Each segment is unique, so it is crucial to understand each separately. By monitoring CLV, you can make targeted adjustments to the customer experience for each element.
Disadvantages of Calculating CLV
However, no metric is perfect. CLV also has some disadvantages to consider:
CLV is not a perfect prediction:
CLV needs to predict customer equity perfectly. Taking it at face value is terrible, but you can keep it in mind as you modify customer experience strategies.
Wide Range of Variables Affect CLV:
Several factors influence customer behavior & can affect a customer's loyalty in one way or another and change their CLV. You can only determine which actions directly affect value increases or decreases.