Why Your Customer Lifetime Value Is Important

By Jeff Sauro

The CLV metric serves many purposes. The most obvious is that it gives you a good idea of how much total profit you can expect from a customer. It isn’t a hard science, but solid calculations based on data yield a reasonably accurate estimate to work with.

Knowing the total lifetime profit (or loss) created by a specific client can also help you determine which goods or services justify higher marketing costs or sales compensation. Moreover, calculating the CLV of different customer segments helps orient your marketing strategy.

Aside from gaining a holistic view of the client, CLV is a good tool for forecasting future sales and profits, using resources efficiently, and controlling costs. Cable companies are a good example of effectively utilizing the concept of CLV.

The reason cable companies offer such low upfront fees is that they’ve calculated the lifetime value of their customers and therefore know they can afford to initially lose a certain amount of money in order to acquire long-term customers.

As another example, the financial services firm Charles Schwab has the lifetime revenue of individual customers ready for managers and employees when resolving problems customers encountered with their service. Employees have the ability to credit customers with free trades, and in some cases, even help offset the losses based on the lifetime value of a customer.

It doesn’t make sense to haggle over $100 with a customer who has spent $10,000 over 10 years with the firm. This philosophy has helped make Charles Schwab a financial firm with one of the highest customer loyalty levels.

A daring customer acquisition strategy like those used by cable companies could be a financial catastrophe without appropriate data to back it and predict customer behavior. Although the CLV concept has been around for years, few companies have the technology to track each customer, know the usage on an individual basis, and implement this metric in order to quantify behavior.