Customer Lifetime Value Model

Customer lifetime value (CLV) is the total amount of revenue (present and future) a company can expect to earn from one customer over the course of that person’s life, less costs for acquisition, serving and retention. There are different ways to calculate CLV, and being able to accurately predict the future piece of the CLV definition can be challenging. The best CLV models rely on the probability of whether or not a customer will purchase in the future. Leading companies regularly review and update their CLV models to ensure the calculations reflect the actual dynamics of the business.

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How companies use customer lifetime value modeling

  • Segment existing customers by expected contributions and implement differentiated strategies for retention and service.
  • Improve conversion and return on spending with a focused CLV and deep customer understanding.
  • Make data-informed hypotheses about which technologies to use in order to acquire and retain the customer.
  • Differentially target new customers with CLV analysis to estimate contributions of potential new customers, avoiding low-value prospects and targeting high-value prospects.
  • Inform key decisions of customer prioritization, acquisition, onboarding and retention.

Key considerations

  • It is essential to build a comprehensive model, incorporating all important metrics, such as churn and total cost to serve.
  • CLV is most useful when combined with an understanding of root causes of customer behaviors and loyalty.

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