Customer Lifetime Value
CLV puts a value on the customer relationship; thus, it is a key component in the CRM system. Knowing the customer's value helps an organization determine which customers they want to strengthen their relationship with and which ones they don't. Read this article to explore the concept of customer lifetime value and why an organization needs to utilize it in its decision-making. Focus on the methodology for calculating CLV and think about the variability inherent in each step of the calculation.
Misuses and Downsides
Net Profit vs. Revenue
A common mistake is for a CLV prediction to calculate the total revenue or even gross margin associated with a customer. However, this can cause CLV to be multiples of their actual value, and instead need to be calculated as the full net profit expected from the customer.
Often ecommerce reporting systems will report Lifetime Revenue (LTR), rather than Lifetime Value based on net profit, due to the difficulty most ecommerce platforms have generating an accurate profit figure (i.e. calculating accurate sold item costs, marketing costs, and delivery costs) on an order by order basis. Lifetime Revenue can still be a very valuable and useful metric for ecommerce stores to report on in order to measure site performance.