Customer Lifetime Value Flashcards, test questions and answers

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What is Customer Lifetime Value?

Customer Lifetime Value (CLV) is a metric used to determine the value of a customer over their lifetime with a given business. It helps companies measure and maximize their return on investment in customer acquisition and retention efforts, by helping them understand how much revenue a customer may generate over their lifespan as a customer. To calculate CLV, businesses need to understand how much each new customer costs them in terms of marketing, advertising, sales and other costs associated with acquiring that customer. They must also estimate the potential revenue from each individual customer over the course of their time as customers. This involves looking at data such as average order size, repeat purchase rate and frequency of purchases. By understanding both the cost to acquire customers and potential revenue generated from each one, businesses can make informed decisions about where to invest resources for maximum return on investment. For example, if one segment of customers generates significantly more revenue than another segment due to higher order size or purchase frequency, businesses might allocate more resources towards acquisition channels that target those specific customers rather than relying solely on broad-based campaigns that target all types of customers indiscriminately. CLV is especially important for subscription-based businesses that rely heavily on recurring payments from loyal customers in order to stay profitable. By understanding CLV metrics such as average lifetime value per user or average lifetime value per cohort (group), these companies can identify which cohorts are most valuable, invest resources into acquiring more members like them and work towards increasing retention rates amongst those cohorts in order to maximize profits long term. In conclusion, CLV is an important metric for any business looking to maximize its return on investment when it comes to acquiring and retaining customers. By understanding both the cost required for acquisition and the potential return generated by individual customers over time, companies can make better decisions about where they should allocate resources for maximum ROI.