Customer Costs in CLV

Main Customer Costs Used to Calculate CLV

In the customer lifetime value calculation, there are five main areas of customer costs to consider, namely:

  1. Acquisition costs
  2. Retention costs
  3. Up-selling costs
  4. Product and service costs
  5. Acquisition cost savings via word-of-mouth (treated as a negative cost)

The first area is that it is customer acquisition costs – which are all costs incurred by the company in order to generate and to fulfill a purchase from a non-customer. Please note that acquisition costs extend beyond just promotion costs into other areas of the marketing mix, which is discussed in the article on types of acquisition costs.

The next two areas of cost are generally considered together in the customer lifetime value calculation – which are a customer retention/loyalty costs, and customer up-selling costs. Both of these costs stem from marketing activities designed to increase customer revenue, either through a longer customer relationship, or through a greater share of customer.

The fourth area of cost is simply the product and servicing cost required to provide the products to the customers that generate the revenue. From an accounting perspective this is essentially the cost of goods sold, along with any supporting service expenses.

The last area of cost to consider, however, is not always used in calculating customer lifetime value. This customer cost relates to acquisition costs savings via word-of-mouth endorsement of existing customers.

It is a potential cost saving because if a brand has a lot of loyal supporters who act as advocates, then the firm’s acquisition costs will reduce (on a per new customer basis), as they are getting some customers for “free”. In the free customer lifetime value Excel template, word-of-mouth benefits are treated as a negative customer cost and has the impact of increasing customer lifetime value.