Answers the Question
How much is a customer worth?
Calculator for Customer Lifetime Value
What Is the Customer Lifetime Value?
This formula is used to understand how much revenue is provided to a firm by each additional customer.
Why Is it Important?
- An understanding of a customer's value will reveal how much firms should invest in advertising and support.
- Additionally it can be used to compare firms in similar industries to help understand how a given firm compares to another.
Formula(s) to Calculate Customer Lifetime Value
- CUSTOMER LIFETIME VALUE = (ANNUAL REVENUE * LIFETIME IN YEARS) - CUSTOMER ACQUISITION COSTS
- This formula is named incredibly poorly. Although one would think it speaks to value, it actually speaks only to revenue. For offerings that consist mainly of fixed costs, this may not matter, but for offerings that entail large variable costs this formula will vastly overstate the worth of a given customer.
- Previous customer lifetimes may shift drastically over time. There is no guarantee that customer behavior will remain the same as they have in the past.