Customer Life Time Value

Woman Doing CalculationsI just fired up an old laptop to retrieve a document.  This was a list of topics I planned to write about, and I thought it would be instructive to review the list.  I had searched through all my current folders several times when it occurred to me that it was created a while ago and it might me on the old Sony.  It took a little work to get the computer working.  When I located the file I checked the date:  May 18, 2005.  The very first item on the list was “Lifetime value of a customer.”

I was first exposed to the concept when I read Customers for Life by Carl Sewel.  I wrote a post about Sewel a couple of years ago.  His book was published in 1990 and at the time Sewel calculated the life time value of his customers at $330,000.  In 23 years I’m sure that value has gone up, and the number is going to be different for every business.

I have a renewed interest in the concept as I have been studying marketing metrics.  This spring I audited a University of Calgary, course called “Metrics and Measurement” taught by Jeff Nelson and Joanne O’Connell.  The text book for the course is “Data-Driven Marketing: The 15 Metrics Everyone in Marketing Should Know” by Mark Jeffery  The course is excellent and one I recommend.

Sewel`s number was a life time sales number.  The academic approach and a perspective that a business owner should be taking today, treats Customer Life Time Value (CLTV or CLV) as a forward looking metric that predicts future profits represented by a customer.  In effect it is a present value of a customer relationship.  If the relationship were viewed as an asset what would its value be?  This number allows a company to set an upper limit on what it is prepared to spend to acquire a new customer (customer acquisition) and the lengths they would go to, to keep a current customer (customer retention).   In future posts I will expand on these two very different metrics.

I won’t go into CLTV formulas and such here but  a good overview of the concept can be found in Wikipedia here.