Customer Lifetime Value: the metric to help you identify your most valuable customers

41% of an e-commerce store's revenue is generated by only 8% of its customers.

(Adobe Article: https://business.adobe.com/ca/resources/digital-economy-index.html)

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For any business it is important to identify who the customers are that generate the most revenue, understand why they continue to buy and what their buying behavior is.

‍Inthis way, we will be able to communicate with them to offer them benefits for their loyalty, continue working on their retention and create strategies to acquire customers with similar characteristics.

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How do we identify them?

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Customer Lifetime Value (CLV) is a metric of how valuable a customer is to a business.

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CLV is the total value of a customer over the entire period (past and future) of its relationship with the business.

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To calculate the CLV in a standard way, you need the transaction history of your customers, including the unique customer ID, date and amount of each transaction.

Using this data, it will be possible to predict, with an acceptable level of accuracy (especially for frequent buyers), the following information:

• Probability that the customer will make a new transaction within the defined period.
• Number of new transactions within this period
• Present value of these transactions.

The long-term value of a company is strongly related to the CLV of its customer base (current and future).

A truly customer-centric company will seek to adopt CLV throughout the organization as the single outcome to validate business decisions.‍

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By predicting the individual CLV of their customers, companies can:

• Segment your customers based on how much value they will generate in the future.
• Forecast this value for a given period, including new customers to be acquired in the future.
• Define the ideal customer profile and prioritize the acquisition of new customers with this profile.
• Set maximum values for customer acquisition and retention costs according to their profile/segment.
• Prioritize products that generate higher CLV.
• Identify and prioritize the solution of customer experience issues that most affect CLV.

A CLV-based segmentation model helps a company know which customers make sense to focus efforts and resources on based on what they are (or can be) worth to its business.

With this segmentation model, marketers will be able to communicate with customers effectively, based on expected future results. The applicability of CLV goes beyond marketing and customer services.

Customer Equity (the sum of the CLV of all customers of a business) has become a critical component in the valuation of corporate businesses.