What is Customer Lifetime Value (CLV)?
It is a prediction of all the value a business will derive from their entire relationship with a customer.
The problem is that you don’t know how long each relationship will last. Therefore, you can only make a good estimate, and compute the CLV as a periodic value, which is to say on a 12-month basis (or similar). Then we can say: This customer’s 12-month Customer Lifetime Value is $…
Why is Customer Lifetime Value so important?
The answer is quite simple. It is because losing a customer means more than losing a single sale. It means losing an entire stream of purchases that the customer would normally make over his lifetime. And that value is greater than you would expect. Just imagine: You buy a car. After a few years, you have a problem with the car. Now the dealer has two options. Either he thinks that he can earn more with new customers and that you are an annoying, old customer. He will ignore your problem and loses you as a customer. His other option is to help you by providing a service. As a consequence, you will probably stay loyal, and 5 years later, you will buy a new car from that dealer.
For him, your 10-years Customer Lifetime Value is now the added value of the two cars.
In order to bind customers to their products, companies even pursue strategies that ensure that customers will stay loyal. Just look at smartphones: If you start with one brand and use it intensely, you will buy another phone from that brand again, because all your files are in the cloud of that company, all your accounts are linked to it…
Just to give you an idea: The estimated lifetime value of a young mobile phone consumer is €34,000. Thus, building a strong relationship is more than important. It leads to customer satisfaction and delight, which maximizes the likelihood that the customer will come back.