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Frank Friend's Blog

Customer Lifetime Value (CLV)

Frank Friend - Wednesday, April 27, 2011

The CLV is the total margin a company generates from its customers over the length of time the customer buys from the company.

It is one of the most powerful and important management metrics, if you don’t know your customers’ lifetime value you will likely make serious errors especially in your marketing decision making.

The CLV (see my Website for how to calculate it) is based on the customer’s retention rate, the referral rate and purchase history. The higher these are the greater will be the CLV. Loyal customers have the highest retention and referral rates. Typically the CLV of a loyal customer is 3-4 times that of the average one.

The CLV can be calculated for the “Average Customer” over entire company which is useful for measuring trends or, and more usefully, calculated for different groups of customers, for example, customers by location, by product groups, by division and so on. This makes it possible to compare the constituents of these groups – Customers in location A have a CLV twice that of location B – Why?

As has been said many times “If you don’t measure it, you can’t manage it”

Another, fundamental, metric is “How much is a customer worth?”  The CLV answers that question

If you know the CLV then you are much better able devise new customer acquisition strategies. Say that the CLV is $5,000 then you have a reliable guide as to how much you can invest to get a new customer, something less than $5,000 obviously, but probably more than if you didn’t know the CLV.

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