Calculating Customer Lifetime Value
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Is your organization pouring out a large budget for sales & marketing activities and not seeing
the returns? Is your organization focused solely on short term cash flows rather than long term
profits? Is your organization unaware of how to calculate the potential profit of each client you
bring in the door? If you answered yes to any of these questions, learning what customer lifetime
value (CLV) is and how to calculate it may benefit your organization.
Customer lifetime value goes by many names and abbreviations including CLV, lifetime value,
user lifetime value, LTV and CLTV. Although its designations are far-reaching, they all share one
general definition:
HOW-TO GUIDE
“The net present value of the cash flow
relationship with a customer.”
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What Is Customer Lifetime Value?
Calculating Customer
Lifetime Value
Common sense tells us that the longer a customer is in relationship with a company, the more
profitable that customer relationship is. However, many companies put the emphasis on new
customer acquisition and not enough effort is made to retain existing customers. This is a mistake,
because the financial impact of retaining customers is substantial: companies can increase profits
by as much as 100% by retaining just 5% more of their customers. For these reasons¹, CLV is a
crucial metric that most organizations overlook mainly because its definition and purpose are not
entirely known.
Understanding the monetary value each customer represents to your organization can help you
budget correctly for your business needs, strategically plan your marketing initiatives and improve
long-term relationships with your customer base.
This How-To Guide details the definition of CLV, the advantages of calculating CLV and the standard
formula for calculating CLV.
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