Why Should You Calculate Customer Lifetime Value?

Would you pay $5000 for a new customer? Too expensive? What if each of them brings you more than $5000 over their lifespan as a customer? Are you still reluctant?

Another case,

Let’s presume Customer A made 10 purchases last year each valued $200, whereas Customer B made 2 transactions but each 1200$. Which customer is more profitable for you? Customer B? What about the Customer Acquisition Cost then? Now the picture has changed, right?

Here, a lovely Customer Lifetime Value (CLV) concept helps us to look at things from a different perspective and eventually make the right decision.

What is Customer Lifetime Value?

Roughly said, Customer Lifetime Value is what customers spend over their lifespan as a customer for your products or services. In other words, CLV is the present value of the future cash flows attributed to customers during their entire relationship with your company.

How to calculate it?

It is enough to google it, to sank into dozens of several formulas to calculate CLV. To make things worse, those calculations vary depending on the types of customers, characteristics of the businesses and industries. It means an ideal CLV formula for Starbucks may look impotent…