Customer lifetime value (CLV) is a concept that considers, over the long term, what each customer can contribute to a business. It combines net present value (NPV) and the potential of each customer, requiring complex modeling that integrates various costs and investments incurred to attract and retain a specific customer. According to Michel Calciu and Francis Salerno, who synthesized the models in 2003, the modeling of this customer lifetime value is influenced by the context and the customer’s relational behavior, whether in a contractual or non-contractual relationship. The study of the models highlights a distinction between customer retention and customer migration, with algebraic mathematical approaches for retention and matrix approaches for migration.
CLV differs from current customer lifetime value (CCV), which reflects the past of the relationship with the customer, and from net present value (NPV), which assesses the current and future relationship with a customer based on the products held. In the field of customer prospecting, this approach can help determine the maximum investment to remain profitable. Peter Dorrington and Jackson Goodwin explain that calculating lifetime value simply involves subtracting fixed and variable costs from total revenue. However, SAS UK executives caution about the actual complexity of accurately estimating these variables, emphasizing the importance of considering future trends through modeling and forecasting.
Although initially developed by mail-order companies, lifetime value remains underutilized due to its computational challenges. Christophe Benavent points out that the concept of customer lifetime value implies a simple management principle: a customer segment is only profitable if the generated margin equals the unit cost of the deployed marketing program. This principle allows for the efficient segmentation of a customer database based on available marketing programs.
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