New customers are always welcome, but do you know which of your customers are the most profitable? Is it those who make one large purchase and never return, or those who spend smaller amounts regularly over several years? Customer Lifetime Value (CLV) will give you the answer, and make it easier for the marketing department to target the marketing budget towards the groups you want to focus on.

Customer Lifetime Value, or the customer's lifecycle value, is a way to measure total customer value for each individual customer throughout the entire customer relationship. It helps you see how profitable, or not, a customer is. The value is a sum that shows how much money a customer is expected to spend with you. The longer the customer stays with you, and the more frequently the customer shops, the greater the CLV.

CLV = Average purchase value x Number of purchases per year x Average length of the customer relationship (in number of years). Below are examples for 2 different customer types in a shoe shop:

• Active senior fitness enthusiast: 800 NOK (per pair of shoes) x 3 (pairs of shoes per year) x 6 (years) = 14,000 NOK

• Young father with small children: 250 NOK (per pair of shoes) x 4 (pairs of shoes per year) x 3 (years) = 3,000 NOK

Which customer you should focus on quickly becomes quite obvious. When you know the customer's CLV, it becomes easy to see which customers you should prioritise.

CLV contributes to increased profitability by helping you focus your efforts. When you gain an overview of your customers' lifecycle value, you can study the various groups more closely and work towards them in a targeted way. Use the information to prioritise which customers to invest in and where to direct your marketing spend.

• Look at the customers with the highest CLV. Who are they, how do you retain them, and how can you attract more customers like them? 
• Examine the customers with the lowest CLV. Can you get them to buy more and become more loyal? What campaigns can you run towards this target group to increase CLV?
• Look at CLV against the cost of recruiting a new customer. Perhaps you are spending more money acquiring new customers than they actually spend with you? Use CLV in the process of defining an appropriate Customer Acquisition Cost (CAC).

Modern MarTech tools make it easier to work with Customer Lifetime Value in a targeted way. Here you get CLV delivered free of charge based on your contact database and transaction history. You can also easily filter relevant contacts and create segments based on, for example, number of purchase occasions, number of items per purchase occasion, and purchase amount.

You can also combine CLV with RFM score when creating segments, giving you even more power and greater opportunities to create smart target audiences. RFM stands for "recency, frequency and monetary value" and is used to assign a score to customers based on: the time of their last purchase, how frequently they shop, and how much they spend. With this information you can create messages for specific segments and monitor what works and what does not. With insight into CLV and RFM, you can also identify customers at risk of leaving, and take action to prevent churn.

Many marketing automation tools also have functionality for what is called Predictive Scoring or Predictions. This means the system uses historical data to forecast future potential for your customers. The system estimates earnings based on previous behaviour and transactions, and gives you insight into how much the customer will be worth to you for the remainder of their lifecycle. You are therefore better equipped to focus on the customers who will deliver the highest returns in the future.

Are you unsure whether you have a MarTech solution that actually enables you to grow in line with your business goals? Read more about what you should expect from your MarTech solution here.

1. Focus on the entire customer experience. From interactions with staff in a physical store, to chat, social media, online shop, loyalty programmes, and customer service. You cannot view a purchase in the online shop as a separate activity from other parts of your business, as all touchpoints the customer has with you form part of the whole and influence the customer's perception of you.

2. Start a loyalty programme. Loyal customers shop more frequently and spend more. A good loyalty programme will have a positive impact on the business and increase CLV.

3. Use RFM score when creating segments. You can combine the attributes in various ways, for example to create an audience of contacts who purchase frequently but at low value, so you can sharpen a campaign for upselling. Or a segment for customers who spend large amounts but infrequently.

4. Reward your most valuable customers, because these are the ones you cannot afford to lose. With an overview of CLV you know who they are and can nurture the relationship so they do not leave.

The insight that CLV analysis provides means you get to know your customers better, and you gain the opportunity to leverage this customer data in tailored and personalised campaigns. Customer data is your goldmine, and with the right data you can be more relevant than your competitors and direct your efforts to the right place.

Do you need some input or a few extra pairs of hands? We are happy to contribute expertise and resources. Get in touch with our team and we will look together at where you want to go and how we can help you get there as quickly as possible.