What is Customer Lifetime Value?
Customer lifetime value goes by many names and abbreviations including CLV, lifetime value, user lifetime value, LTV and CLTV. Although its designations are far-reaching, they all share one general definition:
“The net present value of the cash flow relationship with a customer.”
More specifically:
“Customer lifetime value (CLV) […] is a prediction of the net profit […] attributed to the entire 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 (CLV) can also be defined as the dollar value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship.”
Customer lifetime value (or CLV as we will refer to it for the remainder of this guide) attempts to assess the true, long-term value and/or profitability of each client/customer. The purpose of this metric is to help businesses identify how much to invest in the development of each account.
Advantages of Measuring CLV
Calculating CLV provides a multitude of benefits. In our opinion, the most important advantages of identifying CLV are:
- Valuation of a Customer Relationship – Knowing the dollar value of customers over the duration of the relationship allows you to better assess current and future profitability. The insights gained from this valuation enable more effective investment decisions about customer acquisition costs.
- Evaluates Proper Investment for Each Customer – Measuring CLV allows you to develop a more accurate sales & marketing budget. When you know the CLV, it makes it easier to justify more expensive account development activities early in the relationship with the customer.
- Forecasts Potential Future Value of Customer Relationships – The CLV formula not only estimates current value of a client, but also takes into account the potential value of a client...
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