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Definition: Customer Lifetime Value (CLT)
Customer lifetime value is the present value of the predicted future cash flows which is expected to come from a customer relationship for lifetime. It is very important because it enables managers to shift their focus from short term sales rise to a long term relationship with the customer. It also helps analyze the maximum amount of spending on a customer to build the relationship.
The cash flows are discounted to reflect the time value of money. It helps the company segment its customer as the ones being most profitable and important. The CLT often takes the distribution of a normal curve with 20 % each very profitable and non-profitable customers and the rest being profitable.
The customers at each level might add different value. Losing a customer at a later stage in the customer life cycle is not a big loss but customers who leave early in the life cycle cause a higher loss to the company. It is therefore imperative for a company do plan their investment before spending too much on the campaign. The company should focus on reducing the churn rate by using retention policy or cross selling techniques. However, only reducing the churn rate is not effective. The Companies must instead focus on retaining customers with higher lifetime values compared to customers who are not as valuable as it will be beneficial in the long run.
One drawback of this approach is it doesn't account for the leaving customers.
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