Customer Lifetime Value: Concept, Basic Customer Value
Customer Lifetime Value or CLTV is the present value of the future cash flows or the value of business attributed to the customer during his or her entire relationship with the company.
Description: CLTV is the value a customer contributes to your business over the entire lifetime at your company. It is a very important metric and is used while making important decisions about sales, marketing, product development, and customer support.
By applying Customer Lifetime Value marketing managers can easily arrive at the rupee value associated with the long-term relationship with any customer. It is difficult to predict how long each relationship will last, but marketing managers can make a good estimate and state CLTV as a periodic value.
It is useful metric used by marketing managers especially at a time of acquiring a customer. Ideally, lifetime value should be greater than the cost of acquiring a customer. Some also call it a break-even point.
The basic formula for calculating CLTV is the following:
(Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)
For example, let’s say you run a Health Club where customers pay Rs 1000 per month and the average time that a person remains a customer in your club is 3 years. Then the lifetime value of each customer is (according to the formula above):
Rs 1,000 per month x 12 months x 3 years = Rs 36,000. This means each customer is worth a lifetime value of Rs 36,000.
Once we calculate CLTV we know how much the company can spend on paid advertising such as Facebook ads, YouTube ads, Google Adwords etc. in order to acquire a new customer.
Basic Customer Value
In marketing, customer lifetime value (CLV) is a metric that represents the total net profit a company makes from any given customer. CLV is a projection to estimate a customer’s monetary worth to a business after factoring in the value of the relationship with a customer over time. CLV is an important metric for determining how much money a company wants to spend on acquiring new customers and how much repeat business a company can expect from certain consumers.
CLV is different from customer profitability (CP), which measures the customer’s worth over a specific period of time, in that the metric predicts the future whereas CP measures the past.
CLV is calculated by subtracting the cost of acquiring and serving a customer from the revenue gained from the customer and takes into account statistics such as customer expenditures per visit, the total number of visits and then can be broken down to figure out the average customer value by week, year, etc.
But the process is more nuanced than that. By concentrating on what a customer has previously spent, companies neglect how their marketing or advertising practices have changed over time, resulting in new customers who behave differently than old ones. CLV should never be determined by dividing the total revenue by the number of total customers, since this is too simple a calculation and does not factor into how long some customers have had a relationship with the company. Changes to any of these strategies, as well as any shifts in a company’s customer base as a whole, in the future will prevent companies from depending on past CLVs to predict upcoming ones.