Customer lifetime value has three main components:
- The acquisition cost of customer
- The annual profit of customer
- And the lifetime of the customer to the firm
The average lifetime of a customer
The final component in the customer lifetime value calculation is to work out the average length of customer’s relationship with the firm or brand. In many cases, there will be a general length of time that can be calculated for the average customer.
As a simple example, a student at university is usually a customer of the university for around three years, while they complete their undergraduate degree. While some students will also complete a Master’s degree, there are others who drop out after the first year.
Therefore, as we are interested in the average customer, it is likely to be somewhere around three year mark. Obviously, we don’t estimated, but university records would be able to provide an accurate time period.
Some products will brands will have a very long lifetime of customers. Examples here would include Colgate toothpaste and Kellogg’s cereals. These are products that people tend to consume over long periods of time and it is possible that customers could be loyal for decades. However, on the counter side, there would also be short-term customers who prefer other brands.