Customer lifetime value (CLV) is a prediction of the net profit attributed to the entire future relationship of a business with a customer. The prediction model can have varying levels of sophistication and accuracy.
CLV further refers to the dollar value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship. CLV encourages firms to shift their focus from quarterly profits to the long-termed customer relationships. Customer lifetime value is an important number because it represents an upper limit on spending resources on customer acquisition. Thus, it is an important element in calculating payback of advertising spent in marketing mix modeling.
When calculating CLV there are numerous differences to consider based on what the specific questions are that you want to be answered. But the most efficacious way to calculate CLV is to take the revenue you earn from a customer and subtract out the money spent on acquiring and serving them.
The business owner or CEO use the gathered information while developing strategies for:
Customer acquisition:
Customer Lifetime Value aids in the determination of customer procurement budget based on what the new client will actually bring to your firm. You’ll develop a better understanding of what or how much you can spend for customer acquisition.
Target marketing:
Customer lifetime value helps you spend wisely on advertising and marketing. It lets you focus on the customer segments that deliver the highest profit to your company in order to use your resources efficiently.
Return on investment:
Customer lifetime value provides an excellent indicator and accurate measurement of a particular marketing campaign performance. It helps you in getting maximum return from limited resources.
Effect of management strategies:
The CLV data helps encourage a company culture to emphasize on a long-term customer satisfaction, rather than solely focusing on short-term sales and avoiding the long termed CRM.
Efforts towards customer retention :
Decide what to spend on retaining specific customer segments. This helps you manage your customer relationships in a way that your business is driven towards profitability. Measure customer loyalty, which includes factors such as purchase frequency and probability.
Individual-customer profitability:
You can calculate the profitability of every single customer. This information enables the sales team to focus their efforts on the most profitable new-customer demographic for a particular product/service.
Company valuation :
Customer lifetime value is a crucial aspect of determining the profitability of your company. Knowledge of your customer base and expected growth is useful when seeking additional rounds of funding or evaluating buy-out offers.
Hope the post makes the essence of customer lifetime value for a business pretty clear to you!