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Customer Lifetime Value
Customer Lifetime Value, or CLV, is the total value a customer brings to a business over the lifespan, that is, the entire period of their relationship with the business.
It is calculated for a customer segment, and various calculation methods exist.
The simplest involves multiplying the Average Purchase Value by purchase frequency and Customer Lifespan. But it excludes customer acquisition costs.
Another method involves multiplying the Annual revenues per Customer by the Average lifespan and subtracting the Customer Acquisition Cost.
Consider a streaming service with two subscription plans: Plan A costs 7 dollars, Plan B costs 12 dollars, and the average customer lifespan is one and three years, respectively.
The company spends 100 dollars per customer acquisition.
Calculating CLVs reveals that customers on Plan B have a higher CLV than Plan A.
Additionally, Plan A operates at a loss unless supplemented with advertising revenues.
Such inputs enable the business to prioritize high-value customers and make informed decisions about marketing investments and customer acquisition costs, contributing to profitability.
Customer Lifetime Value
Customer Lifetime Value (CLV) is a metric that quantifies the total revenue a business expects to earn from a customer throughout their entire relationship. It involves predicting the monetary value a customer will bring over time, factoring in their purchasing patterns, frequency, and duration of engagement.
CLV is crucial for businesses to assess the long-term profitability of acquiring and retaining customers. By understanding the value each customer contributes, companies can optimize marketing strategies, customer retention efforts, and overall business decisions. High CLV indicates a strong customer base, while low CLV may prompt companies to reassess their customer acquisition and retention strategies. Ultimately, focusing on maximizing CLV helps businesses enhance customer relationships and drive sustainable, long-term financial success.