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In marketing, customer lifetime value (CLV), lifetime customer value (LCV), or lifetime value (LTV) and a new concept of "customer life cycle management" is the present value of the future cash flows attributed to the customer relationship. 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.

Calculation

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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. In reality, it is difficult to make accurate calculations of customer lifetime value. The specific calculation depends on the nature of the customer relationship. Customer relationships are often divided into two categories. In contractual or retention situations, customers who do not renew are considered "lost for good". Magazine subscriptions and car insurance are examples of customer retention situations. The other category is referred to as customer migrations situations. In customer migration situations, a customer who does not buy (in a given period or from a given catalog) is still considered a customer of the firm because she may very well buy at some point in the future. In customer retention situations, the firm knows when the relationship is over. One of the challenges for firms in customer migration situations is that the firm may not know when the relationship is over (as far as the customer is concerned).

Most models to calculate CLV apply to the contractual or customer retention situation. These models make several simplifying assumptions and often involve the following inputs:

Uses

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 (CPNC, or Cost Per New Customer), and their lifetime value is $60, then the customer is judged to be profitable, and acquisition of additional similar customers is acceptable. For this reason, the costs involved in the first purchase are typically not included in LTV, but rather, in the Cost Per New Customer calculation.

Formula for CLV

Present Value = Future Value/(1+i)ⁿ

(1+i) = Interests N = No of Years

See also

• Marketing strategies
• Customer equity