Customer lifetime value

« Back to Glossary Index

Definition and Importance of Customer Lifetime Value
– Customer lifetime value (CLV) is a measure of the net profit contributed by a customer over their entire relationship with a company.
– CLV encourages firms to prioritize long-term customer relationships over short-term profits.
– CLV represents the upper limit on spending to acquire new customers.
– CLV is important in calculating the payback of advertising spent in marketing mix modeling.
– The term ‘customer lifetime value’ was first mentioned in the book ‘Database Marketing’ in 1988.
– The purpose of CLV is to assess the financial value of each customer.
– CLV differs from customer profitability (CP) as it looks forward and measures the future value of a customer relationship.
– Quantifying CLV involves forecasting future activity, making it more difficult to quantify than CP.
– CLV is calculated by determining the present value of future cash flows attributed to the customer relationship.
– CLV can be used for customer segmentation to identify the most profitable group of customers.

Construction and Methodology of Customer Lifetime Value
– The formula to calculate CLV when margins and retention rates are constant is: CLV = Margin * (Retention Rate / (1 + Discount Rate – Retention Rate)).
– The CLV model treats customer relationships as a leaky bucket, with a fraction of customers leaving each period.
– The CLV model has three parameters: constant margin, constant retention probability, and discount rate.
– The model assumes that if a customer is not retained, they are lost for good.
– CLV is a multiple of the margin and represents the present value of the expected length of the customer relationship.
– A simple formula for calculating CLV is: (Avg Monthly Revenue per Customer * Gross Margin per Customer) / Monthly Churn Rate.
– The numerator represents the average monthly profit per customer, and the denominator accounts for the chance of the customer remaining in future months.
– CLV calculation involves forecasting remaining customer lifetime, future revenues, costs, and calculating the net present value.
– Forecasting accuracy and tracking customers over time can impact CLV calculation.
– Retention models use inputs such as churn rate and retention rate to estimate CLV.

Applications of Customer Lifetime Value
– CLV metrics are commonly used in relationship-focused businesses with customer contracts.
– Industries such as banking, insurance, telecommunications, and business-to-business sectors utilize CLV.
– CLV principles can be extended to transactions-focused categories like consumer packaged goods.
– Retention has a significant impact on CLV, as low retention rates result in minimal increase in CLV over time.
– CLV-based segmentation combined with a share of wallet (SOW) model can help identify high CLV but low SOW customers for targeted marketing.

Uses and Advantages of Customer Lifetime Value
– CLV represents the monetary worth of each customer and helps determine how much a marketing department should spend to acquire each customer.
– It is used to judge the appropriateness of customer acquisition costs.
– CLV is used to calculate customer equity.
– It helps in managing customer relationships as an asset.
– CLV allows monitoring the impact of management strategies and marketing investments on customer asset value.
– Helps determine the optimal level of investments in marketing and sales activities.
– Encourages marketers to focus on the long-term value of customers.
– Enables implementation of sensitivity analysis to determine the impact of spending extra money on each customer.
– Facilitates optimal allocation of limited resources for marketing activities.
– Provides a basis for selecting customers and decision-making regarding customer-specific communication strategies.

Misuses and Dynamic Nature of Customer Lifetime Value
– CLV predictions using nominal figures can be biased slightly high.
– Total revenue should not be used to calculate CLV; net profit is the correct measure.
– CLV predictions may be inaccurate due to missing data on major drivers of customer value.
– Omitted predictors can cause inaccuracies in certain customer segments.
– CLV models may overvalue current customers at the expense of potential customers.
– CLV is a dynamic concept and not a static model.
– It takes into account the potential for marketing to change customer behavior.
– Effective marketing can turn low-value customers into high-value customers.
– CLV models should consider a larger number of middle-value customers.
– Survey data can be used to collect information on potential customers.

In marketing, customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or life-time value (LTV) is a prognostication of the net profit contributed to the whole future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques.

Customer lifetime value can also be defined as the monetary value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship. Customer lifetime value is an important concept in that it encourages firms to shift their focus from quarterly profits to the long-term health of their customer relationships. Customer lifetime value is an important metric because it represents an upper limit on spending to acquire new customers. For this reason it is an important element in calculating payback of advertising spent in marketing mix modeling.

One of the first accounts of the term customer lifetime value is in the 1988 book Database Marketing, which includes detailed worked examples. Early adopters of customer lifetime value models in the 1990s include Edge Consulting and BrandScience.

« Back to Glossary Index

Submit your RFP

We can't wait to read about your project. Use the form below to submit your RFP!

Gabrielle Buff
Gabrielle Buff

Just left us a 5 star review

Great customer service and was able to walk us through the various options available to us in a way that made sense. Would definitely recommend!

Stoute Web Solutions has been a valuable resource for our business. Their attention to detail, expertise, and willingness to help at a moment's notice make them an essential support system for us.

Paul and the team are very professional, courteous, and efficient. They always respond immediately even to my minute concerns. Also, their SEO consultation is superb. These are good people!

Paul Stoute & his team are top notch! You will not find a more honest, hard working group whose focus is the success of your business. If you’re ready to work with the best to create the best for your business, go Stoute Web Solutions; you’ll definitely be glad you did!

Wonderful people that understand our needs and make it happen!

Paul is the absolute best! Always there with solutions in high pressure situations. A steady hand; always there when needed; I would recommend Paul to anyone!

Vince Fogliani

The team over at Stoute web solutions set my business up with a fantastic new website, could not be happier

Steve Sacre

If You are looking for Website design & creativity look no further. Paul & his team are the epitome of excellence.Don't take my word just refer to my website ""that Stoute Web Solutions created.This should convince anyone that You have finally found Your perfect fit

Jamie Hill

Paul and the team at Stoute Web are amazing. They are super fast to answer questions. Super easy to work with, and knows their stuff. 10,000 stars.

Paul and the team from Stoute Web solutions are awesome to work with. They're super intuitive on what best suits your needs and the end product is even better. We will be using them exclusively for our web design and hosting.

Dean Eardley

Beautifully functional websites from professional, knowledgeable team.

Along with hosting most of my url's Paul's business has helped me with website development, graphic design and even a really cool back end database app! I highly recommend him as your 360 solution to making your business more visible in today's social media driven marketplace.

I hate dealing with domain/site hosts. After terrible service for over a decade from Dreamhost, I was desperate to find a new one. I was lucky enough to win...

Paul Stoute has been extremely helpful in helping me choose the best package to suite my needs. Any time I had a technical issue he was there to help me through it. Superb customer service at a great value. I would recommend his services to anyone that wants a hassle free and quality experience for their website needs.

Paul is the BEST! I am a current customer and happy to say he has never let me down. Always responds quickly and if he cant fix the issue right away, if available, he provides you a temporary work around while researching the correct fix! Thanks for being an honest and great company!!

Paul Stoute is absolutely wonderful. Paul always responds to my calls and emails right away. He is truly the backbone of my business. From my fantastic website to popping right up on Google when people search for me and designing my business cards, Paul has been there every step of the way. I would recommend this company to anyone.

I can't say enough great things about Green Tie Hosting. Paul was wonderful in helping me get my website up and running quickly. I have stayed with Green...