Customer lifetime value expresses how much margin an average customer brings the company over the entire span of the relationship, not just on the first purchase. It is calculated from the average order value, purchase frequency, margin and average relationship length. It is precisely this figure that determines how much it is worth investing to acquire a new customer – a company with a high rate of repeat purchases can afford to pay more for the first purchase than one that sells only once. It is worth calculating it separately for segments, since the differences between them tend to be several-fold. For smaller companies, a simplified calculation over two to three years of history is sufficient. Increasing this value tends to be a cheaper path to growth than acquiring new customers. It is also worth tracking its development over time, since a decline is often the first signal of deteriorating care or strengthening competition.
See also: Customer acquisition cost, Customer retention, RFM segmentation.
