Customer Lifetime Value

Customer lifetime value (CTLV) is a way of measuring how much a company' s customers are worth to its business over the time they buy its products and services. A well-run CLTV program can help the firm identify which customers are worth their greatest attention, and can help the firm make the most of its marketing dollars. The CLTV calculation indicates how much individual customers contribute to a firm' s profitability. Customer lifetime value is a way of measuring how much a firm' s customers are worth to them, over the length of time that they remain the firm' s customers. Customer lifetime will vary from industry to industry, and from brand to brand.

There are significant potential benefits in using CLTV. A 5% increase in customer retention can create a 125% increase in profits. A 10% increase in retailer retention can translate to a 20% increase in sales. Extending customer lifecycles by three years can triple profits per customer.

The CLTV process is an analysis of customers according to four main attributes namely:

• Frequency: how often they purchase (regular customers are more likely to purchase in the future)
• Recency: how much time has elapsed since the last purchase (recent customers are more likely to purchase again)
• Amount: how much they spend (higher-spending customers are likely to be more committed)
• Category: what sort of product they buy (some products will be more profitable than others and some may be one-time-only purchases).

For a consumer business, calculate CLTV by analyzing the behavior of customers as groups. A group consists of customers who have the same recruitment date, and are recruited from the same source. The basic calculation has three stages namely to identify a discrete group of customers for tracking, record (or estimate) each revenue and cost for this group of customers, by campaign or season and calculate the contribution to profitability, by campaign or season.