Let's start with an example: a user purchases from a store 5 times a year for a value of about 20 euros and let's assume that he can purchase for another 2 years in the same way. The value that the user generates for the company is equal to 5 x 20 x 2 = 200 euros. To simplify we have used a "gross" measurement, but the CLV should be calculated on the real average value of the user, therefore on the profit margin that the company can estimate over time excluding all costs, including management costs. Assuming that the company has a margin of 6 euros on each product, the CLV will be equal to 5 x 6 x 2 = 60 euros. There are different ways to calculate the CLV in this infographic by Kissmetrics you will find three formulas from the simplest to the most elaborate .
Why is CLV important ?
This metric is used, among other things, to understand how many sales or how long it takes to “pay back” an investment in acquiring a new customer. If, in the previous case, we spent 1 euro to acquire the contact, one sale will be enough to recover. If instead the acquisition cost had been 8 euros, to be profitable, we would have had to wait for the second purchase by the customer. Generally speaking, if the margin is low, repeating transactions over time is vital, precisely to optimize the costs incurred to find new customers. If the margin is high, retention could be a less critical factor, but only apparently. In fact, it remains a necessary key to building a solid and lasting business. It goes without saying that this is even more true for e-commerce with business models based on products with a high repurchase frequency.
The CLV serves to:
establish budgets for generating new customers
build projects to increase this value
operate strategically to improve the list of aruba consumer email cost-of-acquisition ratio, taking into account scalability (it is not a given that many new customers lead to more profits)
invest in higher value user segments to offset lower value ones
CLV is a very stimulating metric because it works positively. It is not only about reducing costs, but also about extending the relationship time with the most valuable users. Increasing engagement is not just a matter of “opportunity”, but it is the occasion to improve the overall perception of the brand in the consumer. Focusing on customer experience is one of the keys to success for many important brands.
As Avinash Kaushik states in this very in-depth article, “If we can identify channels, campaigns, media or propositions that deliver “better than average” customers we can begin to see how much more profitable they are and decide how much more we should be spending on them”. Knowing allows us to have a clear picture of the profitability of our user segments and to study specific strategies for them aimed at increasing their value over time. Personalization and a multichannel approach are therefore the lever to be activated to improve the results of each segment, extending the life cycle and increasing the overall average value.
