What is Customer Lifetime Value?
Customer lifetime value (commonly abbreviated CLV, LVC, and CLTV) is an estimate of the earnings that an individual customer is likely to bring to a business over the entire life of that customer.
Why is Customer Lifetime Value Important?
CLV is used in marketing to set an upper limit for marketing spend. It’s also helpful to business owners and marketers during the marketing budgeting process because it frames a company’s marketing investment in a realistic manner. The customer lifetime value formula takes into account the fact that typically, the cost of acquiring a new customer only has to be met once. However, once a prospect becomes a customer, that customer is likely to make repeat purchases over a number of months or years, and hopefully refer new business if they are satisfied. So even though business owners think they should budget $x in November to attract a new customer into their store who will spend $y in December, the business owner should instead be thinking about how much he is really going to earn from that customer over its entire lifetime — not just immediately following the initial marketing investment.