Customer Lifetime Value

Customer lifetime value has intuitive appeal as a marketing concept, because in theory it represents exactly how much each customer is worth in monetary terms, and therefore exactly how much a marketing department should be willing to spend to acquire each customer, especially in direct response marketing.

Lifetime value is typically used to judge the appropriateness of the costs of acquisition of a customer. For example, if a new customer costs $50 to acquire (COCA, or cost of customer acquisition), and their lifetime value is $60, then the customer is judged to be profitable, and acquisition of additional similar customers is acceptable.

Additionally, CLV is used to calculate customer equity.

Advantages of CLV:

• management of customer relationship as an asset
• monitoring the impact of management strategies and marketing investments on the value of customer assets, e.g.: Marketing Mix Modeling simulators can use a multi-year CLV model to show the true value (versus acquisition cost) of an additional customer, reduced churn rate, product up-sell
• determination of the optimal level of investments in marketing and sales activities
• encourages marketers to focus on the long-term value of customers instead of investing resources in acquiring "cheap" customers with low total revenue value
• implementation of sensitivity analysis in order to determinate getting impact by spending extra money on each customer
• optimal allocation of limited resources for ongoing marketing activities in order to achieve a maximum return
• a good basis for selecting customers and for decision making regarding customer specific communication strategies
• a natural decision criterion to use in automation of customer relationship management systems
• measurement of customer loyalty (proportion of purchase, probability of purchase and repurchase, purchase frequency and sequence etc.)

The disadvantages of CLV do not generally stem from CLV modeling per se, but from its incorrect application.