The Importance Of Increasing Customer Lifetime Value Essay
Customer lifetime value (CLV) is a critical metric used to estimate the value of each customer you acquire. It validates whether you’re actually producing a profit. Several companies strive to increase customer lifetime value because they believe it’s a good indicator of business performance.
The calculation of the CLV is dependent upon the margins you earn per unit of your product, the retention rate, and a set discount rate. Thus, you learn the net present value of one customer.
Since CLV is only an average, factors exist that can complicate the CLV calculation. Sources of variability lie in churn rates and pricing tiers.
Let’s explore the CLV model, the variables that can manipulate your customer lifetime value, and the customer relationship after the initial purchase.
The Traditional CLV Model
The CLV calculation can be very complex. Academic studies offer several ways to identify the underlying components and calculate the end result.
So, to keep it simple, we’ll focus on subscription businesses. Here’s what Kissmetrics calls the “traditional” formula:
Customer lifetime value ($) = Margin ($) * (Retention Rate (%) ÷ [1 + Discount Rate (%) - Retention Rate (%)])
Assumptions behind this formula remain. For example, consider the referral…