Customer Lifetime Value

Customer Lifetime Value

Customer Lifetime Value or CLTV is the current value of potential cash flows or the value of the business entrusted to the customer during his or her relationship with the business. 

Lifetime value for the customer is a measure of customer profitability over time. Customer Lifetime Value is the value that a customer contributes to your business throughout your company's lifetime.

Consumer lifetime value is the monetary value of a contract with a client based on the current value of the relationship's expected future cash flows.

Customer Lifetime Value is one of the key stats that can be tracked as part of a client experience programme. 

Customer Lifetime Value is a measure of how valuable a customer is to your business, not just on a purchase-by-purchase basis but throughout the entire relationship.

It is a very significant metric which is used when making critical decisions about sales, promotion, product creation and customer service.

Through introducing Customer Lifetime Value marketing managers will quickly get to the rupee value associated with every customer's long-term relationship.

How long each relationship would last is hard to predict, but marketing managers should make a reasonable estimate and state Customer Lifetime Value as a periodic benefit.

Lifetime value for the customer is all about building a lasting positive connection with your customers. So it follows that the way to improve the Customer Lifetime Value figures is to cultivate certain relationships with customers.

There are some ways to improve Customer Lifetime Value which are to start a loyalty program, reward your customers, take feedback of customers and invest in customer’s experience.

Customer Lifetime Value is a useful metric that marketing managers use especially at a time when they acquire a customer. Ideally lifetime value would be higher than a customer's purchase cost. Some call that a break-even point, too.

The formula for calculating CLTV :-

(Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)

For example, let’s say you run a Fitness Club where customers pay Rs 5000 per month and the average time that a person remains a customer in your club is 2 years. Then the lifetime value of each customer is :-

5000 x 12 x 2 = Rs 1,20,000

This means each customer is worth a lifetime value of Rs 1,20,000.

Once we calculate Customer Lifetime Value we know how much the company can spend on paid advertising such as Facebook advertisements, YouTube advertisements, Google Adwords etc. to acquire a new client.

All together, Customer Lifetime Value is an important measure of customer profitability which summarizes  total revenue and costs related to a customer over time. 

Customer Lifetime Value also provides a net profit/loss summary of the customer’s total relationship with the firm. It is calculated on a customer basis, or more commonly on a customer's average value within a particular market segment.

Customer lifetime value is generally considered to be a very significant marketing metric, because it correlates within a single number due to the variety of marketing goals.