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Customer Lifetime Value (CLV)

Written By Alexandra Flygare

If you’re in B2B marketing, chances are, you’ve heard of Customer Lifetime Value (CLV). It’s a term that’s thrown around quite a bit, but what does it actually mean, and why should you, as a B2B marketer, care?

Let's break it down. Here’s what we’ll cover:

What is Customer Lifetime Value (CLV)?

Customer Lifetime Value (also known as CLV) is the total worth of a customer to a business over the whole period of their relationship.

It’s not simply about how much a customer spends with you today; it’s about how much they could spend over the months, years, or even decades they stay with your company.

Try to think of it like this: if each of your customers was a character in a movie, CLV would be the box office prediction for that character’s storyline. It’s the estimated total of all the ticket sales (or in our case, purchases) from their entire narrative arc.

Why is Customer Lifetime Value important?

Now, why is this such a big deal for B2B marketers?

Well, understanding CLV helps you make smarter, more strategic decisions. Here’s why:

  1. Prioritization of Resources: Not all customers are created equal. Some are worth more to your business in the long run than others. By knowing the CLV, you can prioritize resources toward acquiring and retaining the most valuable customers, ensuring a better return on your marketing investments.

  2. Optimized Marketing Strategies: When you know how much a customer is likely to spend over their lifetime, you can tailor your marketing strategies accordingly. For instance, if a customer has a high CLV, you might invest more in personalized marketing campaigns to nurture that relationship.

  3. Better Customer Retention: CLV isn’t just about acquiring new customers; it’s also about keeping the ones you have. Understanding what makes a high-value customer can help you develop retention strategies that keep them coming back for more.

How to measure Customer Lifetime Value?

Alright, let’s get to the nitty-gritty: calculating CLV.

Don’t worry; we’ll keep this simple. There are various ways to calculate CLV, ranging from basic formulas to more complex models. Here’s a straightforward formula for CLV to get you started:

CLV = (Average Purchase Value) x (Purchase Frequency) x (Customer Lifespan)

Let’s break that down:

  • Average Purchase Value: This is the average amount of money a customer spends per purchase.

  • Purchase Frequency: This refers to how often the customer makes a purchase within a certain period.

  • Customer Lifespan: This is the average length of time a customer continues to purchase from your company.

Customer Lifetime Value Formula Example

Imagine you run a B2B software company. Your average customer spends $10,000 per purchase, buys from you twice a year, and typically remains a customer for 5 years.

So, your CLV would be:

CLV = $10,000 x 2 x 5 = $100,000

That’s right, each customer could potentially bring in $100,000 over their relationship with your company. That’s the kind of math that makes marketers smile.

FAQs about Customer Lifetime Value

Q: Can CLV be applied to any business model?
A: Absolutely! Whether you’re a SaaS company, a manufacturing firm, or even a marketing agency, CLV can help you understand the long-term value of your customers and guide your marketing strategies.

Q: How often should I calculate CLV?
A: It’s a good practice to calculate CLV periodically—quarterly or annually. This allows you to adjust your marketing strategies based on the changing value of your customers.

Q: What if I have a negative CLV?
A: If your CLV is negative, it means you're spending more on acquiring and retaining customers than you’re making from them. It’s a red flag to reassess your acquisition costs and retention strategies.

Q: How can I increase my CLV?
A: You can increase CLV by enhancing customer satisfaction, upselling or cross-selling, improving your product or service quality, and building strong customer relationships.

Conclusion

Customer Lifetime Value is more than just a metric; it’s a mindset shift for B2B marketers. By understanding and leveraging CLV, you’re not just chasing short-term sales but building long-term relationships with customers who will grow with your business. And in the world of B2B marketing, that’s a game-changer. So next time someone throws around the term CLV, you can smile confidently, knowing you’ve got this—and your customers—for the long haul.