3.21: 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.