Core Concepts: Customer Lifetime Value (LTV or CLV)
By Gregory Ronczewski, Director of Product Design at Ibbaka. See his skill profile.
Definitions
The term Customer Lifetime Value (LTV or CLV) appeared in the 1988 book by Robert Shaw and Merlin Stone titled Database Marketing: Strategy and Implementation. Since then, it has become one of the key metrics used in businesses with recurring revenues to measure the value of a customer. The aggregate customer lifetime value can be used to measure the value of the company.
The standard equation for customer lifetime value is
Gross LTV = Average Revenue per Customer for Period / Churn Rate for Period
Net LTV = Average Revenue per Customer for Period - Cost to Serve for Period / Churn Rate for Period
It is important to segment the customer base by customer lifetime value and to understand which dimension is driving the overall value.
Focussing in on Revenue and Churn gives the following 2x2 matrix.
Ones goal is to move customers to the top right quadrant. As it is generally eaisest to fix one problem at a time we have not included an arrow from the bottom lef t to top right quadrant.
Once you have a customer in the top right quadrant, it is important to continue to grow the LTV, the arrow within the top sight quadrant.
The key to growing customer lifetime value is to grow value to customer (V2C).
All of the phases of the value cycle can contribute to growing LTV.
One has to begin by creating the products and services that deliver value to a customer.
That value has to be communicated across the customer journey and not just by sales and marketing. Customer success plays an ongoing role in value communication.
Value needs to be delivered in the initial implementation and as use evolves across time.
The value delivered should be documented.
Only then can the value delivered and documented be captured in price and contribute to a growing customer lifetime value.
More reading for you
Core Concepts for Pricing and Customer Value Management
Customer Lifetime Value (CLV or LTV) (this post)
Coming soon …
Community Value Driver
Connecting Value and Pricing Models
Cross Price Elasticity
Customer Value Journey
Customer Value Management
Economic Value Driver
Interactions of Cross Price Elasticity and Price Elasticity of Demand
Package Design
Pocket Price Waterfall
Price Elasticity of Demand
Pricing Design
Pricing Model
Value Based Market Segmentation
Value Ratio
Value to Customer (V2C)
