Customer Lifetime Value (CLV) represents the total earnings a company generates from a customer over the entire duration of their relationship. It can be expressed for an individual customer or as an average across a customer base. ### Importance of CLV - A higher CLV indicates greater revenue potential and customer loyalty. - It helps businesses assess whether customer acquisition and retention strategies are profitable. - CLV can guide segmentation strategies, identifying high-value customer cohorts for targeted efforts. - It informs loss ratios, ensuring that certain customer retention efforts are worth the investment. ### Calculation of CLV The simplest way to calculate CLV is by summing all earnings from a customer from onboarding to date or until churn. > [!formula] > $CLV = \text{Average Purchase Value} \times \text{Purchase Frequency} \times \text{Customer Lifespan}$ >[!missing]- On future cash flow calculation > Further exploration and formulas are needed to contemplate future cash flows ### Factors Influencing CLV - **Purchase Frequency**: How often a customer makes purchases. - **Total Ticket Value**: The average amount spent per transaction. - **Retention Rate**: The duration a customer continues purchasing from the business. - - **Customer Service Quality**: A good experience leads to higher retention and repeat purchases. - **Brand Loyalty and Engagement**: Strong relationships and community-building efforts increase CLV. - **Market Competition**: Competitive pricing and unique value propositions affect customer retention. - **Personalization and Recommendations**: Tailored offers improve purchase frequency and order value. ### Strategies to Improve CLV - Increase purchase frequency through loyalty programs, subscriptions, or engagement campaigns. - Increase the average order value by upselling or offering higher-value products. - Enhance customer retention by improving satisfaction and reducing [[Churn Rate]]. ### CLV and [[Customer Acquisition Cost (CAC)]] The CLV-to-CAC ratio determines if customer acquisition strategies are sustainable. Ideally: - A **CLV-to-CAC ratio greater than 1:1** indicates profitability. - A **ratio lower than 1:1** means the company is losing money per customer, requiring strategy adjustments. ### Further Questions - How can future cash flow in CLV be used? - How can predictive analytics improve CLV forecasting?