Understanding customer lifetime value (CLV)

 

Customer lifetime value or CLV is a key marketing metric that is primarily used in relationship marketing oriented organizations. In simple terms, it is the profit attributable to an individual customer during their time as a customer with the organization.

Customer lifetime value has three main components:

Customer acquisition cost

This is the amount of money it costs, on a per customer basis, to attract a first-time customer. Acquisition costs are calculated by dividing the total promotional spend during a period by the number of new/first-time customers attracted in that same period.

The annual profit of a customer

The main component of the customer lifetime value formula is an understanding of what profitability is generated from each individual customer on average.

In simple terms, what is known as “customer profit” is the revenue generated by a customer over a year, less the direct costs of providing that product or service to the customer, less any costs of retention or other forms servicing.

The average lifetime of 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.

Related topics
The customer lifetime value Excel template

Calculating average lifetime in years