CLV - Customer Lifetime Value

By: EconomyWatch   Date: 30 June 2010

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EconomyWatch

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Direct marketers often focus on Cost of Sale (CoS), compare that with the profits of a first sale, and decide whether to market to a segment customers or not based on a breakeven analysis.

However this approach does not factor into the equation future revenue streams from these customers.

If we knew how much a customer was likely to be worth in the future, we could make better informed decisions.

Some customers that would be loss-making on the first order (thanks to high acquisition, CoS or servicing costs) could be wildly profitable in future years.

Customer Lifetime Value or CLV helps us to calculate this future value. Metrics: Customer Lifetime Value (CLV, LCV or LTV)

The Question

How much is a customer worth?

Approach

Present value of expected future revenues from a customer

Commentary

Very useful for companies with contractual relationships such as telcos, banks, subscription service providers, monthly maintenance contract holders etc. Can be used to attribute profitable marketing and service costs.

The Formula

CLV = (Avg Annual Profit * Avg Years with Company)/(1 + Discount Rate%) ^ Avg Years with Company

Sales & Marketing

Marketing for Dummies Guides

Measuring, Marketing, Metrics & KPIs

Online Marketing/ Digital Marketing


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