What is the concept of customer lifetime value (CLV)?

Customer lifetime value (CLV) refers to the total revenue expected from a single customer account throughout their relationship with a business. This metric is crucial for businesses as it helps in understanding how valuable a customer is to the company over time, rather than just based on their first purchase.

Understanding CLV allows businesses to allocate their marketing resources more effectively by identifying which customer segments are most profitable. It also aids in decision-making regarding customer acquisition costs, retention strategies, and even the scaling of marketing initiatives to maximize long-term profitability.

In contrast, while the average time a customer stays with a company, the total marketing budget, and the number of purchases are related metrics, they do not capture the financial aspect of the relationship in the same comprehensive way that CLV does. CLV consolidates these factors into a single, actionable figure that reflects the expected revenue over the entire duration of the customer's engagement with the brand.