Question

What is the formula for calculating Customer Lifetime Value (CLV)?

1) CLV = (profit margin per customer x # of years customer is active) - cost of acquiring customer
2) CLV = (profit margin per customer x cost of acquiring customer) - # of years customer is active
3) CLV = (cost of acquiring customer x # of years customer is active) - profit margin per customer
4) CLV = (cost of acquiring customer x profit margin per customer) - # of years customer is active

Answer 1

The correct formula for CLV is the profit margin per customer multiplied by the number of years the customer is active, minus the cost of acquiring the customer. Average profit, or profit margin, is used in this formula, representing the profitability over the customer's lifespan.

Step-by-step explanation:

The formula for calculating Customer Lifetime Value (CLV) is important for businesses as it represents the total worth of a customer to a company over the entirety of their relationship. The correct formula for calculating Customer Lifetime Value (CLV) is:

CLV = (profit margin per customer × number of years the customer is active) - the cost of acquiring the customer

Average profit is derived from the equation where average profit equals price minus average cost. This is essentially the profit margin. Therefore, if we apply this concept to the CLV formula, we consider the profit margin throughout the customer relationship, subtracting the initial cost of acquiring the customer, which is essentially the investment the company makes to initiate the relationship.