Customer Lifetime Value Definition

Customer lifetime value (CLV) is a metric which describes the total net profit a business can expect to earn on average from each customer. Most businesses use historical transaction data to determine CLV, however, businesses may use different styles of CLV analysis as well.

Individualized CLV might focus on the sources where a group of customers was acquired (e.g., a landing page or traffic source). Cohort analysis is a way of determining the CLV of an entire group of customers. It’s likely that the type of CLV analysis used will depend on the current goals of the company.

Customer Lifetime Value Example

The easiest way to understand CLV would be to imagine that a customer purchases $100 worth of products from a business every year for 10 years. This customer’s CLV would be $1,000. Of course, real-world scenarios often have a lot more variables and less predictability, which is CLV is often calculated in different ways as described in the previous section.

If a business decides to advertise online, CLV is an important metric to take into consideration. Knowing the total profit a customer will yield can help to determine maximum ad spend. Using the example above, a customer acquisition cost of $100 would be a great bargain over time, which might be fairly realistic assuming the business was able to acquire qualified leads for $5 each and had a conversion ratio of 2.5%.

Why is Understanding Customer Lifetime Value Important in Strategic Marketing?

Strategy

Knowing your average CLV is an essential building block of your marketing strategy because it not only helps you project for the future, but to budget in the here and now.

Continuous Improvement

After discovering your CLV, the next step is to figure out how to increase that number. Marketing offers a multitude of methods, strategies, and tactics designed to do exactly that.