What is Customer Lifetime Value?

Before understanding the importance of customer lifetime value, it is important to understand what it is.  Customer Lifetime Value is an attempt to determine the amount of profit that the customer will generate over the lifetime of the customer relationship.  Customer Lifetime Value is usually considered in comparison to Customer Profitability which is a more time-limited, historical, look at the net profit of a customer relationship.  This, of course, makes lifetime value a prediction as opposed to simply a historical calculation, with all the uncertainty that is implied.  

Why is Customer Lifetime Value important?

Customer Lifetime Value allows a business to make important decisions regarding customer acquisition, retention, and service and even product or services offered and pricepoints.  A high value in a customer segment indicates both a highly profitable segment, but also a segment that can support a higher advertising and acquisition spend than a lower value segment.  Customer retention efforts also should take this value into accounts.  A high-value customer or segment can support and is likely to recommend a higher-cost retention program than similar customers or segments with a lower value.  Keeping a high-value customer or segment is critical to successfully running a business, but additionally, shedding extremely low value or negative customer lifetime value customers or segments is also critical.   

A negative customer lifetime value is a customer that is going to cost you money.  Adjusting services offered, prices or other factors to increase the value is a great idea, but firing the customer may also be required.   Without understanding customer lifetime value, it's nearly impossible to make these retention decisions successfully.   This value calculation also greatly impacts customer service as service is a cost, and high customer service costs impact lifetime value, and segmenting customers by value can allow a business to offer different service options for different segments.  It doesn't usually make sense to offer high cost, high touch customer service options for a customer who's lifetime value is low or negative.  In relation to retention, high-cost service offerings can be very successful in keeping high-value customers and segments engaged and active. 

Finally,Customer Lifetime analysis can be very helpful in determining the price point of current offerings and additional offerings to provide.   A segment with a low value may benefit from new products or services to increase that value.  High value segments may be ripe for additional options as they are already profitable and may well be more likely to purchase new offerings.