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.
Common ways of calculating a company's CLV include the following:
Average revenue per user: Determine the average revenue per customer per month (total revenue ÷ number of months since the customer joined) and multiply that value by 12 or 24 to get a one- or two-year CLV. This approach is simple to calculate but does not take customer behavior into account or changes over time, either in customers' preferences or company strategy.
Cohort analysis. A cohort is a group of customers that share a characteristic or set of characteristics. By examining cohorts instead of individual users, companies can get a picture of the variations that exist over the course of an entire relationship with groups of customers. Factors such as market changes, seasonality and the introduction of new products, competitors or promotions could skew cohort analysis.
Individualized CLV. Companies not interested in broadly calculating CLV often focus on determining the total value of customers by source, channel, campaign or other mediums such as coupons or landing pages on a company website. This could mean comparing CLVs as obtained through social media advertising against those from other digital marketing tactics, for example, with a focus on whether company resources are being efficiently spent.
The CLV can affect many different areas of the business since it is not focused on acquiring many customers or how cheaply those customers can be obtained but, instead, emphasizing efficient spending to maximize customer acquisition and retention practices. Customer segmentation can affect CLV in that some groups of customers might be more highly valued than others.