Customer Lifetime Value (CLV) is a measure that estimates the total value a customer will bring to a company over the entire duration of their business relationship. In other words, CLV calculates the total revenue a customer is likely to generate for a company, minus the costs associated with acquiring and servicing that customer, over the entire duration of their relationship with the company.

Calculating Customer Lifetime Value

CLV is generally calculated by taking into account three main elements:

1. Average purchase value: The average amount spent by the customer on each purchase.
2. Purchase frequency: The average number of times a customer makes a purchase over a given period.
3. Customer relationship duration: The length of time the customer remains active with the company, i.e. continues to make purchases or use services.

Importance of CLV

Understanding and maximizing CLV is crucial for companies, as it enables them to :

• Optimize acquisition costs: By knowing how much a customer is worth over the long term, a company can better adjust its spending on acquiring new customers.
• Improve customer loyalty: By focusing on increasing the lifetime of a customer, companies can maximize the profitability of their customer base.
• Making strategic decisions: CLV helps guide marketing strategies, product development and loyalty programs.

Example of Customer Lifetime Value in the finance sector

Let’s take the example of a bank that offers current accounts, credit cards and mortgages. Let’s imagine a customer opens a current account with this bank.

1. Average purchase value: The customer uses his credit card regularly and pays interest charges each month. The bank also generates income on the current account through maintenance or overdraft fees, and commissions on credit card transactions. If the customer takes out a mortgage, this adds a substantial source of income for the bank.
2. Frequency of purchases: The customer makes several transactions each month with his credit card, in addition to regular payments on his mortgage. He or she may also take out other financial products from the bank over time, such as a car loan or insurance.
3. Duration of customer relationship: Let’s assume that the bank manages to maintain a relationship with this customer for 20 years, continuing to offer financial products tailored to his needs at every stage of his life (current account, credit cards, mortgage, consumer loans, etc.).

This customer’s Customer Lifetime Value would be the sum of all income generated by its financial products (fees, interest, commissions) over this 20-year period, less service and acquisition costs.

Conclusion

In this example, Customer Lifetime Value enables the bank to understand a customer’s potential profitability over the long term. Rather than focusing solely on short-term revenues, the bank uses CLV to develop strategies that maximize the value of each customer over several decades. This can include efforts to build customer loyalty, offer personalized products, and minimize churn rates, thereby increasing the duration of the customer relationship and, consequently, CLV.