What is customer lifetime value (CLV)?

Customer lifetime value (CLV) is best understood as a projection of net profit attributed to future customer relationships. It represents the total worth of a customer to a business over the entirety of their interaction. This metric takes into account not just the immediate revenue generated from a customer’s purchases, but also the potential future revenue that can be expected from their continued patronage.

When calculating CLV, businesses typically factor in the average order value, purchase frequency, and the duration of the customer relationship, ultimately translating these figures into an estimated profit. This projection helps organizations make informed decisions about marketing, customer service strategies, and resource allocation, as understanding the long-term value of customer relationships can significantly influence strategic planning.

While customer satisfaction is important for maintaining relationships and can indirectly influence CLV, it is not a direct measure of value over time. Similarly, while the total revenue from a customer is a component of CLV, the focus on net profit rather than gross revenue provides a more accurate picture of the financial contribution of a customer, making the correct answer particularly relevant for businesses aiming to maximize profitability.