{"id":260959,"date":"2024-03-19T05:40:19","date_gmt":"2024-03-19T05:40:19","guid":{"rendered":"https:\/\/imarticus.org\/blog\/?p=260959"},"modified":"2024-03-19T05:40:19","modified_gmt":"2024-03-19T05:40:19","slug":"what-is-customer-lifetime-value-clv-how-do-we-measure-engagement-and-churn","status":"publish","type":"post","link":"https:\/\/imarticus.org\/blog\/what-is-customer-lifetime-value-clv-how-do-we-measure-engagement-and-churn\/","title":{"rendered":"What is Customer Lifetime Value (CLV)? How do we measure engagement and churn?"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">As a business owner, you need to understand your customers and their needs.Tracking how well your services or products work out with your customers and modifying them as per the demands will elongate the life of your business.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Tracking sales revenue, profit margin and customer retention are just some of the metrics that help you stay on track, as your business expands. If you end up not tracking any of the essential business metrics, you might not be able to predict unexpected challenges in your business journey.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">One of the most important metrics that business owners track is customer lifetime value (CLV). This metric will give you a preview of what your relationship with an average customer will look like during your business lifecycle.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Most successful organisations track CLV and banks on it to help expand their business. A <\/span><span style=\"font-weight: 400;\">chief business officer<\/span> <span style=\"font-weight: 400;\">is responsible for analysing the business metrics and developing strategies that align with market trends. In this guide, we will talk about the importance of CLV in businesses.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">What is the customer lifetime value (CLV)?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Customer lifetime value (CLV) is a metric that indicates the total revenue a business can expect from a customer account throughout the business relationship. It considers the revenue value of the customer and compares it to the business\u2019s predicated customer lifespan.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The higher the CLV of a customer, the more valuable the buyer is to your business. This metric helps in gauging the current customer loyalty. If a customer continues to purchase your product or service, it&#8217;s a good sign that your marketing strategies are working.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Customer lifetime value models\u00a0<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">There are two models using which businesses can choose to measure customer lifetime value. These models are:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Historic customer lifetime value\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">As the name suggests, this model uses previous purchase data to predict the value of a customer. It does not consider if the existing customer will continue with the organisation or not.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In the historic model, the value of your customer is determined by the average order value. This model is especially useful if most of the customers are only interacting with your company over a certain period.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, most customer journeys are not the same. This model has some limitations.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Active customers, considered valuable according to the historic model, can become inactive and alter your data. On the contrary, inactive customers who start purchasing from you again might get overlooked as they are deemed \u2018inactive\u2019.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">\n<h3><span style=\"font-weight: 400;\">Predictive customer lifetime value\u00a0<\/span><\/h3>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">This CLV model forecasts the purchase behaviour of new and existing customers using machine learning or regression.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The predictive customer lifetime value model will help you identify your most valued customers and the services or products that bring you the most sales. With this prediction, you can also <a href=\"https:\/\/imarticus.org\/blog\/developing-effective-marketing-strategies-and-marketing-plans\/\">strategise your business<\/a> to increase customer retention in the long run.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It is the responsibility of a <\/span><span style=\"font-weight: 400;\">chief business officer<\/span> <span style=\"font-weight: 400;\">to choose the appropriate CLV model for a business.\u00a0<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-260393 alignright\" src=\"https:\/\/imarticus.org\/blog\/wp-content\/uploads\/2024\/03\/IIM-U-CBO-05-1080x1080-1-300x300.jpg\" alt=\"marketing courses\" width=\"300\" height=\"300\" srcset=\"https:\/\/imarticus.org\/blog\/wp-content\/uploads\/2024\/03\/IIM-U-CBO-05-1080x1080-1-300x300.jpg 300w, https:\/\/imarticus.org\/blog\/wp-content\/uploads\/2024\/03\/IIM-U-CBO-05-1080x1080-1-1024x1024.jpg 1024w, https:\/\/imarticus.org\/blog\/wp-content\/uploads\/2024\/03\/IIM-U-CBO-05-1080x1080-1-150x150.jpg 150w, https:\/\/imarticus.org\/blog\/wp-content\/uploads\/2024\/03\/IIM-U-CBO-05-1080x1080-1-768x768.jpg 768w, https:\/\/imarticus.org\/blog\/wp-content\/uploads\/2024\/03\/IIM-U-CBO-05-1080x1080-1-100x100.jpg 100w, https:\/\/imarticus.org\/blog\/wp-content\/uploads\/2024\/03\/IIM-U-CBO-05-1080x1080-1-140x140.jpg 140w, https:\/\/imarticus.org\/blog\/wp-content\/uploads\/2024\/03\/IIM-U-CBO-05-1080x1080-1-500x500.jpg 500w, https:\/\/imarticus.org\/blog\/wp-content\/uploads\/2024\/03\/IIM-U-CBO-05-1080x1080-1-350x350.jpg 350w, https:\/\/imarticus.org\/blog\/wp-content\/uploads\/2024\/03\/IIM-U-CBO-05-1080x1080-1-1000x1000.jpg 1000w, https:\/\/imarticus.org\/blog\/wp-content\/uploads\/2024\/03\/IIM-U-CBO-05-1080x1080-1-800x800.jpg 800w, https:\/\/imarticus.org\/blog\/wp-content\/uploads\/2024\/03\/IIM-U-CBO-05-1080x1080-1.jpg 1080w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/p>\n<h2><span style=\"font-weight: 400;\">What are the benefits of the customer lifetime value metric?\u00a0<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">CLV helps business owners make informed decisions to expand their business. This metric helps in understanding whether your customer retention strategies, <a href=\"https:\/\/imarticus.org\/chief-business-officer-programme-iim-udaipur\/\">marketing programmes<\/a> or even the quality of your product\/service is up to the mark. It also gives direction, based on your customer retention, which direction the business can expand for better growth.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">By understanding the CLV of your business, you get answers to some important business questions.\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Which products drive the highest profitability.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The amount an average customer is expected to spend.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">How much is available to spend on new customer acquisition, which still keeping the business profitable.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Which is your most profitable client domain.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">What kind of products high-end customers are looking for.\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Finding the answer to these questions through CLV, will give you a much better understanding of your business performance. You can work on the areas which need improvement, which will increase client retention and drive in more revenue. Another benefit of understanding CLV is the customer acquisition cost (CAC) can significantly reduce with time.\u00a0<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Calculating CLV<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">There are two ways by which you can calculate the CLV of your business. These two ways are:\u00a0<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Accumulated data\u00a0<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">If the historical sales data of your business is available, this way is far more accurate. All orders by individual customers are put together to get their own real CLVs.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For instance, your business has been operating for some time, but you only now decided to start monitoring your CLV, then you can use ecommerce analytics tools to find the historical data from day one.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The formula used is:\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">CLV = Purchase 1 + Purchase 2 + \u2026. + Purchase n (here n is the number of purchases made by a customer)<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Average estimate\u00a0<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">If the granular data of the purchases made is not available, you can estimate an average using the formula:\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">CLV = AOV x n<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It considers the <a href=\"https:\/\/www.optimizely.com\/optimization-glossary\/average-order-value\/\">average order value<\/a> (AOV) and the average order number you get from every client. This method is mostly used for businesses that are just launching to give a market estimate.<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">Churn rate<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Another metric which is often calculated is customer churn. It is the rate at which a customer stops doing business with your business.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Churn rate is calculated using the formulas: (Lost customers \/ total number of customers at the beginning of the period) \/ 100<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Ways to improve customer lifetime value\u00a0<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Businesses are always looking for ways to enhance their customer experience and boost customer retention. Here are some tried and tested ways to improve the CLV of your business.\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Connect and interview with your best customers to understand why they continue to choose your business. With this information, you can develop marketing strategies to strengthen these aspects.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Make returning items convenient for customers. If this process is complicated or expensive, it will lower the odds of them making another purchase from your brand.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Ensure you provide exceptions for your loyal customers to increase customer retention. For instance, if a customer is cancelling a subscription, offer them a small discount to give them the option of remaining a user.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Reward your loyal customers by offering them discounts or freebies with their purchases.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Provide freebies along with large orders. This will encourage the new and existing customers to keep engaging with your business.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Set the right delivery date. Providing a delivery date of 15th March and delivering it on the 13th, is much better than the other way round.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Keep in touch with your long-time customers. Loyal customers want to know that you haven&#8217;t forgotten about them. Also, make it easy for them to contact you.\u00a0<\/span><\/li>\n<\/ul>\n<h4><span style=\"font-weight: 400;\">Conclusion\u00a0<\/span><\/h4>\n<p><span style=\"font-weight: 400;\">With CLV, you can shape your business strategies to ultimately build more successful, profitable businesses. It allows you to attract and retain long-term customers who will become your brand\u2019s advocates, as well as repeat buyers.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Customer experience is a vital driver of the CLV of a business. By understanding the needs, preferences and gauging the experience of your customers, you can increase your business revenue.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Every company across the globe needs experts who can calculate CLV and make necessary business strategies. If you are interested in building a career as a <\/span><span style=\"font-weight: 400;\">chief business officer<\/span> <span style=\"font-weight: 400;\">check out the <\/span><a href=\"https:\/\/imarticus.org\/chief-business-officer-programme-iim-udaipur\/\"><span style=\"font-weight: 400;\">Chief Business Officer Programme<\/span><\/a><span style=\"font-weight: 400;\"> offered by Imarticus learning.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This twelve months course has been built in association with IIM Udaipur. It will equip you with the necessary knowledge and skills to excel in the fiercely competitive business landscape.\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>As a business owner, you need to understand your customers and their needs.Tracking how well your services or products work out with your customers and modifying them as per the demands will elongate the life of your business. Tracking sales revenue, profit margin and customer retention are just some of the metrics that help you [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":260960,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_mo_disable_npp":"","_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[1807],"tags":[],"class_list":["post-260959","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-management"],"acf":[],"aioseo_notices":[],"modified_by":"Imarticus Learning","_links":{"self":[{"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/posts\/260959","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/comments?post=260959"}],"version-history":[{"count":1,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/posts\/260959\/revisions"}],"predecessor-version":[{"id":260961,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/posts\/260959\/revisions\/260961"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/media\/260960"}],"wp:attachment":[{"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/media?parent=260959"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/categories?post=260959"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/imarticus.org\/blog\/wp-json\/wp\/v2\/tags?post=260959"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}