Posted in Marketing and Strategy Terms, Total Reads: 397
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.
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.
No. of customers
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.