Customer Lifetime Value
Term from the CRM Lexicon
Definition
Customer Lifetime Value (CLV) is a key metric in customer relationship management. It describes the total financial value a customer generates over the entire duration of their relationship with a company – minus the costs of acquisition, support, and retention. CLV helps companies evaluate the economic benefit of individual customers or customer groups and make data-driven strategic decisions.
It's not just about short-term revenues, but about the long-term perspective: a customer who buys regularly, speaks positively about the company, and requires little support is significantly more valuable than a one-time buyer with high support needs.
Significance
| Total Value of a Customer | It considers not only past but also future revenues and profits that a customer can generate over the entire duration of the relationship. |
| Profitability of Customer Relationships | Companies can thus identify how profitable their customer relationships are and where there is potential for improvement. |
| Strategic Decisions | CLV helps in prioritizing customers, designing marketing and sales strategies, budget planning, and long-term forecasts. |
Calculation
There are various calculation methods that differ depending on the industry and available data. A commonly used, simple formula is:
CLV = (average revenue per transaction) x (number of repeat transactions) x (customer retention rate)
An extended variant can also include customer acquisition costs (CAC) and use contribution margin instead of revenue:
CLV = (contribution margin x repurchase rate) x customer lifetime – customer acquisition costs
Important
By calculating CLV, companies gain a deeper understanding of their most profitable customers and can develop more effective strategies for sustainable and long-term customer relationships.