Customer retention is quite dependent on the customer lifetime value. In layman terms, customer lifetime value tells us what would be the profits from a customer if he is retained by the brand for life. In actual terms – Customer lifetime value (CLV), Lifetime customer value (LCV), or Lifetime value (LTV) is the net present value of the cash flows attributed to the relationship with a customer. The use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.
In theory, the lifetime value depicts exactly what each customer means to the firm in monetary terms. For example – You might be worth 1000$ to a barbers shop throughout life and probably your worth must be thousands of dollars to a local grocery store if he retains you for life. However, this is in theory. In reality, it becomes very difficult to calculate customer lifetime value.
Lets see in detail how calculating customer lifetime value actually helps the firm.
Calculation of customer lifetime value
- Annual customer revenue – 500$
- Average number of loyal years – 20
- Company profit margin – 10%
- Customer lifetime value – $1000
Cost of attracting new customers
- Cost of sales calls (Including personnel salaries, expenses, allowances etc) – $500
- Average number of sales calls to convert prospect to customer – 3
- Cost of attracting a new customer – $1500
These costs may vary as some customers might even need more convincing whereas others might already be looking for the product. Now Clearly, the company is spending more on attracting new customers rather than retaining them. Thus the calculation of customer lifetime value helps in understanding exactly what level of revenue is it generating from each customer. Furthermore, by calculating costs you can get an idea of averaging out the cost of attracting new customers and retaining old customers to gain maximum profits.
You might want to refer to this article on wikipedia and another article by Mr Arthur middleton hughes for calculating customer lifetime value. I think he does justice to the CLV system. http://www.dbmarketing.com/articles/Art251a.htm
Advantages of calculating CLV
- CLV makes us look at customer retention expenses as an asset rather than a liability
- It brings out a balance between cost of attracting new customers and profits in retaining old customers
- CLV can be a basis for costs to be associated in promotions and communications to attract new customers and retain old customers
- CLV can be used to calculate customer equity