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Customer lifetime value is how valuable a customer is to the firm. Customer Lifetime Value (CLV) describes the amount of revenue or profit a customer generates over his or her entire lifetime. Many retailers optimize their customer acquisition strategies by trying to minimize how much they spend to acquire each customer (“cost per acquisition” or CAC”). When you understand the lifetime value of different customers, however, you can optimize more effectively for the long run. Rather than simply optimizing for CAC, you can look at the difference between CAC and CLV. After all, if one customer is 10 times more valuable than another, it’s certainly worth spending a little more to acquire him.
Customer lifetime value (CLV) can also be defined as the dollar value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship. Customer lifetime value is an important concept in that it encourages firms to shift their focus from quarterly profits to the long-term health of their customer relationships. Customer lifetime value is an important number because it represents an upper limit on spending to acquire new customers.For this reason it is an important element in calculating payback of advertising spend in marketing mix modeling.
Customer Lifetime Value (CLV) determines how worthy a customer is to firm. Calculation of Customer Lifetime Value for all the customers helps the firms to put the customers in hierarchical order on the basis of their contribution to the firm’s profits. In other words we can say, by calculating CLV, a firm comes to know that how much it can invest in retaining the customer so as to achieve positive return on investment. This can be the basis for formulating and implementing customer specific strategies for maximizing their lifetime profits and increasing their lifetime duration. That means CLV helps the firm to treat each customer differently based on their contribution rather than treating all the customers same. A firm has limited resources and ideally wants to invest in those customers who bring maximum return to the firm. This is possible only by knowing the cumulated cash flow of a customer over his or her entire lifetime with the company or the lifetime value of the customers.
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