Customer lifetime value is a metric that helps a business evaluate the total profit they are likely to expect from a single customer throughout their relationship with the company. This is a crucial metric when analyzing and projecting the future value of a customer base, not simply on a purchase-by-purchase basis but across the entire relationship period.
There are two ways of looking at customer lifetime value:
Historic customer lifetime value
Historic customer lifetime value is measured by looking back at past events, essentially presenting a customer's monetary value through what they have already done. For example, if you have purchased $10 worth of coffee every month from the same coffee shop over the last 10 months, your historic customer lifetime value would be $100.
This is a simple and easily calculated value, and it helps businesses understand existing customers to create profiles of average and ideal customers.
Predictive customer lifetime value
A more complex algorithmic metric is predictive customer lifetime value. By using historical data along with social, demographic, and operational data, businesses can calculate predictions about how long a customer relationship is likely to last and what value it will be. This metric may consider purchase frequency, conversion rate, average customer retention duration, acquisition costs, etc. Ultimately, it serves as a method to calculate customer value over their entire relationship, including the future, to help companies determine when and how to invest in customer loyalty.
Why is customer lifetime value significant?
Customer lifetime value is a core metric for all businesses to know. By understanding customer lifetime value, you can:
- Save money by keeping existing customers rather than investing in new ones
- Drive growth with reliable existing customers rather than spending to get new ones
- Spot areas of your business that lead to customer loss
- Identify ideal customers and target more potential customers like them
- Understand whether to invest in customer retention or customer acquisition
Customer lifetime value is an integral part of digital marketing.