What is Customer lifetime value?
Customer lifetime value is a measure of customer profitability over time. To help explain this concept, let’s start with a formal definition of customer lifetime value (CLV) from a well-regarded marketing metrics textbook. In the textbook Marketing Metrics: the definitive guide to measuring marketing performance (Farris et al 2010), the authors defined customer lifetime value as:
“Customer lifetime value is the dollar value of a customer relationship based on the present value of the projected future cash flows from the relationship.”
At first glance, this looks a little complicated and financially focused – but it is really quite straightforward.
The present value of the projected future cash flows is simply the amount of profit/loss you expect to make from a particular customer over time (calculated in today’s dollars).
Therefore, in this definition of customer lifetime value, CLV is defined as a single dollar amount that measures the potential profit/loss of a customer to a firm or brand.
Definitions of Customer Lifetime Value (CLV)
Some approaches to defining customer lifetime value (CLV) include:
- Customer lifetime value is the economic net worth of a customer to the firm.
- Customer lifetime value is the net profit contribution of the customer to the firm over time.
- Customer lifetime value is a measure of a customer’s aggregate profit to the firm over the total time that the customer deals with the firm.
- Customer lifetime value measures the total profit derived from a customer during the time that they are a customer of the firm.
Key Points of the CLV Definitions
All of these definitions are appropriate to use, and are essentially communicating the same definition of customer lifetime value. The key points to note are:
- Customer lifetime value is calculated as a single dollar number,
- CLV summarizes total revenue and costs related to a customer over time,
- CLV provides a net profit/loss summary of the customer’s total relationship with the firm,
- It is calculated on per customer basis, or more usually on the average value for a customer within a particular market segment,
- CLV is an important measure of customer profitability and
- Customer lifetime value is usually considered to be a very important marketing metric, because of the range of the marketing objectives it measures within a single number.
Difference between Customer Profitability and Customer Lifetime Value