Customer Lifetime Value

Abstract

Customer lifetime value (CLV) refers to the firm's estimation of the net worth of a customer over time. This chapter defines and discusses the concept of CLV and highlights the strategic importance of the CLV metric in managing customers profitably. Specifically, this chapter discusses the CLV metric around three critical questions – what, how, and why. The "what" section provides a discussion on the concept and definition of CLV, along with the drivers of CLV. The "how" section focuses on how CLV can be measured, along with a review of the popular approaches presently used in modeling CLV. Also, this section discusses recent extensions of the CLV metric. Finally, the "why" section discusses the benefits of adopting a CLV-based management approach vis-à-vis the development of CLV-based strategies. In presenting the CLV-based strategies, the chapter demonstrates the resulting enhanced financial impact by way of a reduction in overall marketing costs, an increase in overall customer response rates, and, most importantly, an increased overall customer and firm profitability.