Article

Peter Rivett-Jones
Peter Rivett-Jones 24 May 2023

The Challenges of Customer Lifetime Value (CLV)

We all agree Customer Lifetime Value is important, but there’s not much agreement after that. This blog is about the challenges of Customer Lifetime Value (CLV). CLV is a fantastic concept but defining that value and measuring it is difficult.

Customer Lifetime Value is one of those phrases that is bandied about in CRM Marketing. You’ll go to a meeting and when CLV is mentioned everyone will nod their head, someone will say how important it is and the head nodding will continue.

However, if you ever then enter into a conversation about what is meant by Customer Lifetime Value, the nodding often quickly stops. Head scratching and disagreement often prevails.

Customer Lifetime Value is a fantastic concept. The idea that you measure customer value over a longer term makes perfect sense. If you spend a small fortune recruiting a customer why would you try to determine a customer’s ROI over their first year of sales?

That customer is going to be a customer for years to come. The principle of CLV is easily understood but the reality of actually defining that value and measuring it is another matter. There are many different calculations for CLV, some involving churn rates and gross margin but I like to keep it simple.

For me CLV = average value of a purchase x number of times the customer will buy each year x average length of the customer relationship (in years).

The first challenge comes in as, who do we mean by the customer?

Are we taking the average customer lifetime value across the entire customer base or we referring to an individual customer or customer segment. The problem with taking averages is that it often masks the true picture.

Most companies have some form of Pareto effect or 80:20 bias in their customer base. The top 20% of customers generating 80% of revenue and whilst the numbers do differ slightly by client and sector, the bottom line is that there will be great disparities in customer value, purchase frequency and number of years active as a customer.

You are probably better looking at CLV by key customer segments either based on some form of extended RFV (Recency, Frequency, Value Model) or customer types & profiles. 

The second challenge is agreeing the length of the customer relationship. In the automotive sector where there are long purchase cycles are we calculating the customer relationship based on consecutive purchases or are we looking at the actual lifetime of the customer.

As I’ve discussed in a previous blog in sectors like retail defining the length of a customer relationship and therefore lapse rates is tricky as customers typically spread their custom across multiple retailers and customer spend can fluctuate from one retailer to another.

New research by Econsultancy, carried out in association with Sitecore and comprising 900 responses, shows the CLV concerns of client-side organisations, agencies, vendors and consultancies. 

The study reveals that more than three quarters of company respondents (76 per cent) either somewhat agree (25 per cent) or strongly agree (51 per cent) that CLV is an important concept for their organisation. However, only 11 per cent strongly agree that they are able to measure it. Only 6 per cent of agencies strongly agree that their clients have a handle on CLV measurement.

Customer Lifetime Value as a tool can be beneficial, but only if it isn’t considered an absolute. Not every customer is going to have the same value. However, this tool can help to position a business to be stronger against their competition in the future. 

If you understand your CLV well, that can help shape your business strategy to keep loyal customers, rather than investing the resources in acquiring new ones. If your customer lifetime value is on the rise, that could mean you should continue to invest in product development or your customer service teams. If your CLV is declining, that might tell you your latest marketing strategy might need a reboot. 

Customer Lifetime Value helps you understand and gauge current customer loyalty. If customers continue to purchase from you time and time again, that’s usually a good sign that you’re doing the right things in your business. 

If you’d like to talk about improving your Customer Lifetime Value, we'd love to hear from you! 

Sheenum Attri
Sheenum Attri

Thanks for the insightful article and the challenges associated with CLV. I had the same questions when I was studying the concept of CLV. Could you also share from your experience how can the challenges be overcome and explain the other method of calculating CLV (involving retention rate etc.)

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