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

The concept of 'customer lifetime value' (CLV) refers specifically to the total amount of money a customer is expected to spend during their lifetime as a customer of a business. This measurement is crucial for businesses as it helps them understand the long-term value and profitability of individuals or segments of their customer base. By calculating CLV, companies can make informed decisions regarding customer acquisition strategies, marketing budgets, and retention efforts, ensuring they invest effectively in maintaining customer relationships that yield the highest returns.

In contrast, the overall profit margin of a product focuses on the profitability of individual items rather than the long-term relationship and value a customer brings. The average sales per customer in a given period measures revenue generated within a short timeframe without considering future interactions, while the cost of acquiring a new customer pertains to expenses related to marketing and sales efforts aimed at attracting new clients, which is separate from assessing the value generated by a customer over time. Understanding CLV enables businesses to align their strategies with long-term growth rather than immediate sales gains.