What is Customer Lifetime Value?

Customer lifetime value is an assessment of the potential for an existing relationship with a customer to continue into the future, and thus generate cash flow for the provider over a period of time. Sometimes known as lifetime customer value or simply lifetime value, the focus of this type of evaluation is establishing and maintaining an ongoing relationship with the consumer, rather than just on the generation of a one-time sale. Many businesses seek to identify ways to extend the customer lifetime value or customer equity of each client, often by providing ancillary support that goes beyond simply offering quality products that result in sales.

Part of the process of assessing customer lifetime value, or CLV, involves identifying ways to retain the business of a consumer once it has been initially earned. Depending on the type of product purchased, this may involve providing ongoing support of some type. For example, a magazine may offer subscribers ongoing support in the form of a customer service department that responds to queries or concerns about the delivery of the magazines. Customer service and support may also offer subscribers discounts to renew subscriptions that are scheduled to expire in the near future, or any other relevant issue that the customer may present. The idea is that by offering this ongoing support, consumers are likely to return again and again over a number of years, because of the positive rapport and trust that has developed.

There are several other factors that may be involved in the process of determining a customer lifetime value. One of the more common approaches is to calculate what is known as the churn rate. Here, the focus is on anticipating the percentage of consumers that will not remain customers after a certain amount of time, for various reasons. The idea is to identify when new customers must be brought on board to replace those that leave, while also finding ways to keep the turnover in the customer base as low as possible overall.

Most attempts to project customer lifetime value will also look closely at the cost of replacement versus the cost of retention. With this factor, the idea is to decide if the company would generate a higher return by replacing lost customers with new ones that pay the standard or published rates for the goods and services offered. At the same time, the business would also consider the possibility of offering discounted rates to existing customers as an incentive for them to continue doing business with the company. If it is determined that the volume of business generated by a given customer is substantial, and the possibility of replacing the lost revenue with a series of smaller customers who generate less volume but will pay full retail rates is not reasonable, there is a good chance that the business will offer the larger customer incentives to continue the relationship.

Identifying customer lifetime value makes it possible to plan operating budgets in advance, with reasonable certainty of how those budgets will be funded. As additional benefits of the process, assessing the lifetime value of a customer can often provide inspiration for better ways to organize the production process, enhance the quality of existing products, and refine the level of customer support that is offered to consumers. From this perspective, consumer lifetime value is not just about determining how long customers will continue spending money with the firm, but also how they aid in helping the business to work smarter and reach more consumers, while maintaining existing customer satisfaction.