Customer lifetime value (CLV or CLTV) is the projected total profit the customer generates during their entire relationship with the company. Higher CLV means more profit to the company. It helps companies determine how much they should invest in acquiring new customers and retaining existing ones. CLV can be used to measure the loyalty of customers and to divide customers into different groups for personalised marketing.
There are several ways of calculating CLV. The simplest way is to multiply the average value of a purchase by the average number of times a customer buys in a week (month or year) and by the average length of the relationship in weeks (months or years). More complicated methods take into account such metrics as the margin, discount rate, retention cost, and churn rate.
Customer lifetime value is often paired with customer acquisition cost (CAC). Dividing CLV with CAC helps companies see if they are using the right amount of funds for acquiring new customers. The perfect CLV to CAC ratio is 3:1. This means that the customer’s value is three times more than the cost of acquiring them. If the ratio is lower, then the company is spending too much on acquiring new customers. If the ratio is higher, then the company should spend more to not lose out on potential business.