How to Apply Customer Lifetime Value in Business - dummies

How to Apply Customer Lifetime Value in Business

By Jeff Sauro

The CLV can be used to evaluate the amount of money that can reasonably be devoted to customer acquisition. In order for your business to be profitable and financially sustainable, it is essential that the CLV outweigh the customer acquisition costs.

Otherwise, your business is bound to lose considerable amounts of money. If it costs $1,000 to acquire a new customer through marketing, sales, and production costs, but the customer generates only $75 over the typical lifetime, then that’s a losing strategy.

To develop a marketing budget, you need to reflect on how much and where you will invest your money:

  • Explore allowable acquisition cost: How much can you afford to spend to get a customer who will continue to return for repeat business?

  • Explore investment acquisition cost: How much is it going to cost to acquire new customers?

Certain customer segments are more loyal and generate more profits than others over their lifetime. Focusing the customer acquisition strategy on those more profitable segments helps ensure that the customers you invest money to acquire are going to stay with you and keep generating revenue.