Customer Lifetime Value (CLV)

A key metric. The total revenue a business expects to earn from a a single customer account over the duration of their relationship with the company. CLV helps businesses understand the long-term financial contribution of a customer, providing a clear indication of how valuable a customer is beyond their initial purchase. This insight is crucial for determining how much should be spent on acquiring and retaining customers, ensuring that marketing investments are proportional to the value they will generate.

Customer Lifetime Value (CLV) considers various factors, such as the average purchase value, purchase frequency, and the average duration a customer remains with the company. By calculating CLV, businesses can forecast future revenue streams from existing customers and make strategic decisions about customer acquisition costs (CAC), marketing spend and customer retention strategies. CLV helps businesses determine how much they should invest in acquiring new customers and retaining existing ones. By knowing the lifetime value of a customer, a business can ensure that the cost of acquisition and retention does not exceed the revenue generated by that customer. CLV encourages businesses to focus on long-term customer relationships rather than just immediate sales. Building customer loyalty and increasing retention rates are critical strategies for maximising CLV. Customers with a higher CLV may justify higher acquisition costs, whereas customers with lower CLV may require more cost-efficient strategies to generate a profitable return.

CLV = Average purchase value x Purchase frequency x Customer lifespan

If a customer spends $100 per purchase, makes 5 purchases per year and remains a customer for 3 years, the CLV can be calculated as $1,500. This means the business can expect $1,500 in total revenue from this customer over the course of their relationship.

Discounted CLV

Net Present Value (NPV) takes into consideration the fact that money received in the future is worth less than money received today due to inflation and opportunity cost. When calculating the discounted CLV using NPV, businesses adjust the future revenue expected from a customer to reflect its present value. This adjustment provides a more realistic estimate of a customer’s worth, considering that future cash flows diminish in value over time. This adjustment provides a more realistic estimate of a customer’s worth.

So, if a customer will bring you $500 every year for the next 3 years, those future $500 payments are actually worth less than $500 today. To reflect that, we use a discount rate (let’s assume 10%) to reduce the value of those future payments to what they’re worth in today’s terms. When you add up those future payments after adjusting for the time value of money, you get the NPV-adjusted CLV. In this case, the adjusted total is £1,243.43, which is lower than the original £1,500 estimate

Segmenting customers based on their CLV

By segmenting customers based on their CLV, businesses can allocate resources more effectively, focusing on the customers who offer the highest return on investment.

Evaluating High-Value Segments involves several key steps.

Historical Data Analysis is the first step. Marketers dig into past purchasing behaviours, frequency of interactions, and engagement patterns to predict future value. This helps identify which customers or segments are worth prioritising.

Next, Customer Profiling goes beyond just financial value. Marketers look at psychographic data—attitudes, lifestyles, and preferences—to develop a more comprehensive understanding of these high-value customers. This data is crucial for tailoring marketing messages and creating experiences that resonate on a personal level.

Thirdly, Channel Preference is another important factor. It’s not just about knowing who the high-value customers are—it’s about knowing how to reach them. Are they more responsive to emails, social media ads, or perhaps loyalty app notifications? Targeting them through their preferred channels increases the likelihood of effective engagement.

Now, when it comes to targeting these high-value segments, personalised marketing is the most powerful tool. Tailoring product recommendations or sending special offers based on a customer’s purchase history and preferences goes a long way toward deepening the relationship. High-value customers are more likely to stay loyal if they feel that their needs and preferences are truly understood.

Offering exclusive access—whether that’s early product launches, VIP customer support, or invitations to special events—creates an elevated experience that makes high-value customers feel recognised and appreciated. This builds loyalty and long-term retention.

Lastly, feedback loops play a critical role. High-value customers are often the most engaged and willing to provide feedback. Creating dedicated channels for them to share their thoughts on products or services makes them feel invested in the brand, increasing their likelihood of continued loyalty.

In summary, segmenting customers based on their lifetime value allows businesses to focus on their most profitable segments. By using data to personalise interactions, offering exclusive experiences, and maintaining open feedback loops, companies can not only retain high-value customers but also deepen their loyalty over time.