What You Need To Know About Customer Lifetime Value

In a paper published on April 18, 2017 in Harvard Business Review, Michael Schrage, a research fellow at MIT Sloan School’s Center for Digital Business tells us more about customer lifetime value. In marketing, the customer lifetime value (CLV) is a prediction of the net profit a company attributes to its entire future relationship with a customer. In short, it is a measure of customer profitability.

Customer Lifetime Value & Customer Profitability

Of course, being able to calculate the Customer Lifetime Value is thereby a very powerful tool. Most of all, it enables companies to optimize their acquisition spending by maximizing value instead of minimizing costs. In particular, CLV metrics allow companies to find and retain the most profitable customers. Thus, they are essential tools to guarantee future customer profitability.

However, those metrics suffer from several limitations and serious definitional problems. In fact, they don't account for how customers become more valuable over time. In his paper, Michael Schrage tells us how “innovation must be seen as an investment in the human capital and capabilities of customers”. Therefore, CLV metrics should include in their calculation how investments in innovation make customers more valuable, and companies should rethink how to measure customer value.

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