Customer lifetime value
From Wikipedia, the free encyclopedia
In marketing, customer lifetime value (CLV), lifetime customer value (LCV), or lifetime value(LTV) is a metric that projects the value of a customer over the entire history of that customer's relationship with a company. Use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.
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[edit] Calculating customer lifetime value
Customer lifetime value has intuitive appeal as a marketing metric, because in theory it allows companies to know exactly how much each customer is worth in dollar terms, and therefore exactly how much a marketing department should be willing to spend to acquire each customer. In reality, it is often difficult to make such calculations due to the complexity of the calculations, lack of reliable input data, or both.
The specific calculation depends on the nature of the customer relationship. For example, companies with a monthly billing cycle, such as mobile phone operators, can count on a reasonably reliable stream of recurring revenue from each customer. Car manufacturers, on the other hand, have less insight into when or whether a customer will make a repeat purchase. Nevertheless, certain data inputs are commonly used when making customer lifetime value calculations:
- Acquisition cost The amount of money a marketing department has to spend, on average, to acquire a single new customer.
- Churn rate The percentage of customers who end their relationship with a company in a given time period. Churn rate typically applies to subscription services, such as long-distance phone service or magazines.
- Discount rate The cost of capital used to discount future revenue from a customer. Discounting is an advanced topic that is frequently ignored in customer lifetime value calculations. The current interest rate is sometimes used as a simple (but incorrect) proxy for discount rate.
- Retention cost The amount of money a company has to spend in a given time period to retain an existing customer. Retention costs include customer support, billing, promotional incentives, etc.
- Time period The unit of time into which a customer relationship is divided for analysis. A year is the most commonly used time period. Customer lifetime value is a multiperiod calculation, usually stretching 3-7 years into the future. In practice, analysis beyond this point is viewed as too speculative to be reliable.
- Periodic Revenue The amount of revenue collected from a customer in the time period.
- Profit Margin Profit as a percentage of revenue. Depending on circumstances this may be reflected as a percentage of gross or net profit. For incremental marketing that does not incur any incremental overhead that would be allocated against profit, gross profit margins are acceptable.
[edit] See also
- Customer focus
- Marketing strategies
[edit] Other sources
- Bauer, Hans H. and Maik Hammerschmidt (2005), "Customer-Based Corporate Valuation – Integrating the Concepts of Customer Equity and Shareholder Value," Management Decision, 43 (3), 331-348
- Berger, Paul D. and Nada I. Nasr (1998), "Customer lifetime value: Marketing models and applications," Journal of Interactive Marketing, 12 (1), 17 - 30
- Haenlein, Michael, Kaplan, Andreas M., Schoder, Detlef (2006), "Valuing the Real Option of Abandoning Unprofitable Customers When Calculating Customer Lifetime Value," Journal of Marketing, 70 (3), 5 - 20.
- Jonker J.J., N. Piersma and Dirk Van den Poel (2004), "Joint Optimization of Customer Segmentation and Marketing Policy to Maximize Long-Term Profitability," Expert Systems with Applications, 27 (2), 159-168.
