What is Customer lifetime value?

What is customer lifetime value analysis?

A customer lifetime value (CLV) analysis uses historical business data and predictive analytics to examine the revenue a customer brings in over the full span of their relationship with your business.  A CLV analysis examines factors like purchase frequency, purchase volume, average spend, customer engagement and customer loyalty.  Depending on the purpose of your CLV project, this analysis could focus on the value added in the past or examine potential value in the future.

Findings from a CLV analysis can inform future marketing work, personalise communications, increase customer acquisition, boost loyalty and reduce churn.

two Measurements of customer lifetime value

 Customer lifetime value can be measured from two different angles – historical and predictive.  Both can help you better understand customer profitability, engagement and loyalty.

Historical CLV

This traditional approach to CLV analyses past data, including purchase frequency and overall spend, to pinpoint a customer’s value to your business.

Predictive CLV

This approach estimates the future value of a customer using predictive analytics, often driven by machine learning models.  Predictive CLV is used to identify customers likely to deliver the most revenue in the future.

The core purpose of a CLV analysis is to identify your most valuable customers, the insights uncovered during a CLV project can then feed into other areas – including churn analysis, personalisation and targeting in marketing, customer acquisition and budget allocation.

three Factors that influence customer lifetime value

Several factors can influence customer lifetime value – including demographics, brand loyalty and overall customer experience.

Demographics

The demographic groups a customer fits into can impact their CLV.  For example, a higher income bracket may correspond with a higher CLV, while younger customers may have a lower lifetime value in general.  Understanding how demographic factors interact with CLV can help you target customer groups more precisely.

Loyalty

Customers who are very loyal to your business or brand are less likely to churn and tend to have a higher CLV.  This means increasing loyalty, either through loyalty programmes, targeted communications or special offers, is a worthwhile goal.

Customer experience

Customer experience can have a real impact on CLV because elements like ease of ordering, positive experiences with staff and personalised communications can increase sales.  Improving the customer experience at multiple touchpoints can be a way to increase CLV overall.

The business benefits of CLV analysis include a better understanding of customer value, insight into how your loyalty programme is working, a deeper knowledge of acquisition costs and more efficient marketing.

Better understanding of customer value

Improving your understanding of customer value can help you improve customer service and retention across your organisation, potentially boosting profitability over time.

Loyalty programme viability analysis

A CLV analysis can help you find out how effective your loyalty programme is.  If your loyalty programme members have a higher CLV than other customers, it’s probably worth continuing.  On the other hand, if there’s no correlation between your loyalty scheme and CLV, it may need to be reworked or scrapped altogether.  Check out our Loyalty Programme guide to help you refresh your rewards. 

Understand acquisition costs in relation to CLV

When you know how much a particular demographic or customer group is likely to be worth throughout their relationship with your business, you can decide if it’s worth the average acquisition cost to bring them in.

Marketing efficiencies and cost savings

CLV helps you focus on the highest-value customers rather than taking a broad-brush approach to your marketing and communications.  This could result in a lower marketing spend and help you increase the ROI of each marketing dollar.

How Datamine can help with customer lifetime value analysis

Datamine has helped hundreds of Australian and New Zealand organisations understand their customers’ value.  We work with clients throughout the analysis process, from goal setting and project design to analytics and deployment.  Thanks to our deep knowledge of customer value and industry trends, we offer insight and guidance to ensure our clients get the most value from their analytics projects.   

Want to measure the value of your customers? Get in touch to talk CLV with the Datamine team.