Lifetime Value of a Customer

Posted in Marketing and Strategy Terms, Total Reads: 319
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Definition: Lifetime Value of a Customer

The customer lifetime value is the total profit a business makes from acquiring a customer. The lifetime value is the profits that a firm ends due to their lifetime relationship with the customer. Consider a hypothetical example. Assume that a firm decides to go acquire customers at three different places- a mall, a theatre and a playground.


The Customer acquisition costs (CAC) would be:


Location

Total amount spent

No. of customers

CAC

Mall

100Rs.

100

1Re.

Theatre

150Rs.

50

3Rs.

Playground

250Rs.

25

10Rs.

This scenario says that the mall is an apt place, since the CAC is least over there. Now consider the Customer lifetime value (CLV) and the corresponding profits also.


Location

Amt. spent

No. of customers

CAC

CLV

Revenue

Profits

Mall

100Rs.

100

1Re.

10Rs.

1000Rs.

900Rs.

Theatre

150Rs.

50

3Rs.

30Rs.

1500Rs.

1350Rs.

Playground

250Rs.

25

10Rs.

100Rs.

2500Rs.

2250Rs.


So, now when we also take the Customer Lifetime value into consideration, we observe that the Playground is the best place to acquire customers.


The CLV helps in taking important decisions about sales, products, marketing, product development etc. It helps to decide how much is to be spent on a customer. It helps identify the ‘Star customers’ who generate maximum profits. Ways to service these ‘Star customers’ better by making customised products for them. How much to spend to retain the customer. Which customers need to be given more priority and personal attention?


Generally, CLV is calculated on a 12months basis. It is calculated by subtracting the money spent on serving the customer from the revenue earned by a customer over a year and then finally adjusting the fixed and other additional costs. It is important for every business to calculate the CLV, since it helps in taking crucial business decisions.

 

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