Customer Lifetime Value (CLV) is a key metric for measuring long-term growth. It’s a direct indicator of how much value a customer is expected to create over the lifetime of their association with your business. A 2018 Criteo survey results indicated that 81% of marketers surveyed said that monitoring CLV can increase sales, 68% agreed that implementing CLV data boosts retention and 56% believed doing so drives customer loyalty.

CLV helps you monitor key indicators of business performance such as margin, retention and loyalty. It tells you who your high-value customers are and what you can do to boost the loyalty of and generate more value from low-value customers. It also lets you understand how much you can afford to spend on customer acquisition.

This value differs for every customer. A higher CLV means a more loyal customer who will pay longer, create more referrals and purchase more. It’s also better economically to serve and sell to a customer who has a higher CLV.

How To Calculate CLV

While calculating the CLV of a customer, you need to analyze the transaction history and behavioral pattern of that customer or similar customers and determine their lifespan and the margin they will generate for your business.
While there several approaches to CLV calculation, recurring revenue businesses can use a simpler formula to calculate CLV:
(Recurring monthly revenue x customer lifetime) – (customer acquisition cost + lifetime cost to serve)

This formula also tells us that to boost CLV, you will have to minimize service costs and identify cross-sell and upsell opportunities to increase recurring monthly revenue while ensuring that the customer stays with you longer.

How To Achieve A CLV Breakthrough

Here are five steps to get started with a strong CLV strategy:

1. Know your customers well.

Focus on acquiring more customers to boost CLV can still lead to higher churn risk (i.e. shorter lifetime) if customer experience is bad. Instead, the aim should be to know what your customers find valuable and deliver the best customer experience.

Pursuit of higher CLV forces your customer-facing teams to understand what customers value and to focus on driving experiences that deliver long-term business value. It also helps in analyzing how CLV changes in different customer segments, tailoring the experience accordingly to grow the CLV.

2. Identify more profitable customers.

By calculating CLV for every customer, you can segment them among high, medium and low CLV segments. This helps to identify the needs of each segment and drive proactive strategies to mitigate revenue risks or opportunities based on the segment.

Customer micro-segmentation also allows you to maximize profitability through more effective personalization. The results from Formation’s survey of 2000 U.S. customers suggest 79% of the consumers agreed that they were more loyal to the brand that uses more personalization tactics.

3. Drive profitable retention at scale.

Customer retention is the key to long-term business growth since 80% of future profits come from 20% of your existing customers.

One way to spot CLV risks in real time is to use machine learning technology to predict CLV for every customer based on available data. These predictions will help in early interception of the risks in a proactive manner and extend the lifetime of high-risk customers.

Proactive retention also allows you to address risk drivers that are less expensive because customer risk is intercepted when the customer hasn’t canceled. Early detection coupled with micro-segmentation also enables you to A/B test personalized offers for higher net present value (NPV), and thus reduce the cost of retention.

4. Allocate budget better.

By calculating customer CLV, you understand customer satisfaction, journey and profile and margin associated with every customer. You get insights into how much you’re spending on acquiring, serving and retaining each customer and how much revenue you’re generating from them. Once you identify different customer segments based on this, it’s easier to allocate a budget to marketing, sales and retention activities.

5. Invest in customer obsession.

Even with all the benefits listed above, it’s easy to assume that CLV is all about identifying high-value customers and investing more in growing their value. However, it’s not. The idea behind CLV goes beyond that and is centered on creating a loyal and happy customer base.

Four CLV Challenges

Here are a few major CLV-related challenges business leaders face:

1. Inability To Assign CLV To Every Customer

Most businesses calculate CLV for their entire business (macro-level) and don’t assign CLV for every customer (micro-level) due to the lack of models and analytical tools that can perform such big data analysis.

2. Inability To Use CLV For Improving Operations

It’s one thing to calculate CLV for every customer, and it’s another to use those insights to actually drive tailored customer engagement to achieve desired business results across customer touchpoints and channels.

3. Inability To Measure The Outcomes

A closed-loop system can take the data, convert it into CLV intelligence, operationalize it through systems and teams and then capture the outcomes at the touchpoints to drive iterative improvements. Most businesses take years to mature to this level because of the complexities involved as well as the lack of a long-term vision.

4. Working In Silos

A number of different departments often work in isolation but are involved in a customer’s journey. The customer data is, therefore, scattered across multiple siloes. Business leaders must ensure to break all siloes and orchestrate a single view of customers which a focus on CLV can facilitate.

If you’re a recurring revenue business, CLV is an important metric that shifts your focus from short term to long term and delivers sustainable business advantage by linking customer experience with real business impact. To effectively use CLV to drive growth, businesses need to think long term and create a unified customer view with CLV assigned to every customer. This will allow them to grow profitably by retaining happy customers who pay more and stay with you longer.

This article was originally published in Forbes.