How To Measure Customer Lifetime Value (CLV)

Team ThunderAct

Metrics are important for businesses. They do not only determine whether a campaign or strategy is successful, but they also help find out if any areas require improvement.


One of the most important sales metrics is the customer lifetime value (CLV). Understanding CLV can help companies make well-informed decisions when it comes to both marketing and sales strategies. Measuring CLV can seem overwhelming at first, but having the right tools and knowing what it is all about will help it be easier for you.


What It Is

Before going into CLV calculation, it is important to understand first what it is all about. 


Attracting new clients can be challenging. But retaining customers can be equally, if not more, difficult. As a business, making sure current customers remain loyal to the company is crucial. Not only will it ensure sustainability, but it also has a lower overhead than finding new customers.


Customer lifetime value (CLV) refers to the total expected revenue that can be obtained from a customer throughout their relationship with the company. Essentially, CLV tells a company how much money they can expect to receive from a customer over a certain period. This metric also helps companies measure customer acquisition cost (CAC), which refers to the costs and resources necessary to acquire an additional customer.


How to Measure CLV

As mentioned earlier, identifying how to measure CLV seems daunting at first. But it is quite simple if you know what you are looking for.


Generally, CLV boils down to a single number value. However, to get there, you need to understand the different factors affecting your CLV. While there may be different formulas with varying complexity being used today, starting with the simplest one can help you. 


Analyze customer data and determine the average transaction size, number of transactions, and retention period. These pieces of information will make up your CLV formula. Multiply the figures you get to calculate your CLV.


Average transaction size is also known as the average order value. Consider looking at a certain period, such as monthly, quarterly, or yearly. Meanwhile, the average number of transactions is the total purchase or frequency of visit. Lastly, the retention period is the average length of time the customer spends with your brand. How long do they stick and remain loyal? 


The figures you get for each input will have a direct impact on your CLV. However, other factors can also have an indirect effect on your CLV. For instance, increasing your product prices can improve the average transaction size. But it can also lessen the number of transactions your customers make.


When it comes to sales and marketing, using the right metrics and tools is a must. It will help ensure you remain relevant in the market and support your efforts to achieve business growth.

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