Customer lifetime value (CLV) measures the total value of a customer over their entire relationship with a business. Calculating CLV with a discount rate accounts for the time value of money and helps businesses prioritize customer relationships that will generate the most long-term value. For example, a retail company might calculate the CLV of a customer who spends an average of $100 per month for five years to be $5,000 if they assume a 5% discount rate.
Understanding CLV is crucial for businesses to make informed decisions about customer acquisition, retention, and marketing strategies. By prioritizing high-value customers, businesses can allocate resources more effectively and maximize their return on investment. Historically, the concept of CLV has evolved significantly, with advancements in data analytics and predictive modeling enabling businesses to calculate and track it more accurately.