Customer Lifetime Value (CLV or CLTV) is the predicted revenue a customer will bring in over their contract lifetime. Also known as Lifetime Customer Value (LCV) or simply Lifetime Value (LTV). The prediction model can be anywhere on a range of accuracy.
The Purpose of Customer Lifetime Value
The main purpose of the CLV is to assess the financial value of each customer. Each customer is unique and will therefore give a different lifetime value. This means that the predicted CLV is important in the decision making of whether or not to spend the money to acquire the customer.
While the actual predicted CLV can be complicated to calculate, below is a depiction of a simplified version. It is the combination of the average transaction cost the customer has, how frequently they purchase from the company, and the expected length of the relationship. While this may be oversimplified, the concept is the same when trying to predict CLV. In it’s simplest form, it is how much revenue that customer will bring in.
CLV as it Relates to Acquisition
Customer Lifetime Value is directly related to customer acquisition cost. This is because you want the maximum payback from the customers you are acquiring. If the predicted CLV is less than the acquisition cost, it is not smart to spend the money on acquiring that customer. The CLV for a customer is the upper limit of what the company should be willing to pay to acquire that said customer.
More About CLV
CLV is an important part of customer acquisition. To learn more about this process, this tutorial about tracking acquisition can be useful. CLV is also useful when measuring customer engagement levels, which is discussed more here. Knowing how much money a customer can bring in is a good indicator of how engaged they will be in the company.