Customer lifetime value
From Free net encyclopedia
Customer lifetime value (also variously referred to as lifetime customer value or just lifetime value, and abbreviated CLV, LCV, or LTV) is a marketing metric that projects the value of a customer over the entire history of that customer's relationship with a company. Use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.
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Calculating customer lifetime value
Customer lifetime value has intuitive appeal as a marketing metric, because in theory it allows companies to know exactly how much each customer is worth in dollar terms, and therefore exactly how much a marketing department should be willing to spend to acquire each customer. In reality, it is often difficult to make such calculations, either due to the complexity of the calculations, or to the lack of reliable input data, or both.
The specific calculation depends on the nature of the customer relationship. For example, companies with a monthly billing cycle, such as mobile phone operators, can count on a reasonably reliable stream of recurring revenue from each customer. Car manufacturers, on the other hand, have less insight into when or whether a customer will make a repeat purchase. Nevertheless, certain data inputs are commonly used when making customer lifetime value calculations.
- Acquisition cost
- The amount of money a marketing department has to spend, on average, to acquire a single new customer.
- Churn rate
- The percentage of customers who end their relationship with a company in a given time period. Churn rate typically applies to subscription services, such as long-distance phone service or magazines.
- Discount rate
- The cost of capital used to discount future revenue from a customer. Discounting is an advanced topic that is frequently ignored in customer lifetime value calculations. The current interest rate is sometimes used as a simple (but incorrect) proxy for discount rate.
- Retention cost
- The amount of money a company has to spend in a given time period to retain an existing customer. Retention costs include customer support, billing, promotional incentives, etc.
- Time period
- The unit of time into which a customer relationship is divided for analysis. A year is the most commonly used time period. Customer lifetime value is a multiperiod calculation, usually stretching 3-7 years into the future. In practice, analysis beyond this point is viewed as too speculative to be reliable.
See also
Other sources
Berger, Paul D. and Nada I. Nasr (1998), "Customer lifetime value: Marketing models and applications," Journal of Interactive Marketing, 12 (1), 17 - 30
Bauer, Hans H. and Maik Hammerschmidt (2005), "Customer-Based Corporate Valuation – Integrating the Concepts of Customer Equity and Shareholder Value," Management Decision, 43 (3), 331-348