Customer Life Time Value
In the sales and marketing world, we all know that not all customers are equal – each customer has a current and a potential value. That is, the latter being the discounted cash flows a business would expect to receive over the course of a reasonable time period. Known as Customer Life Time Value (CLV), the technique allows business to forecast the expected profit yield from customers.
An important factor as part of calculating a company’s value (ie stock price value), besides financial valuation purposes, CLV is especially useful to marketers to determine:
- the most profitable customers (invest more into this segment for a higher ROI)
- the less valuable customers (so that we can spend less on them)
- which marketing promotions are profitable (eg Buy-1-Get-1-Free)
- the success of past marketing campaigns by the after-effects of CLV change
- future profit values through predictive analysis on the factors determining customer loyalty and spend
CLV should be used whenever a significant marketing investment decision is to be made at any levels of the organisation. Essentially, it can be used as a form of feasibility studies to evaluate the profitability levels of a given marketing project. However, do note on the major limitation of CLV: if we do not know when exactly the customer will leave (ie non-contractual customer relationship such as a hotel stay), then the computation of CLV will be impacted, depending on the nature of the customer relationship.
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