What is the difference between customer lifetime value and customer profitability?

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Customer lifetime value (CLV) and customer profitability (CP) are two key metrics that measure how much a customer is worth to a business. However, they are not the same and they have different implications for marketing research and strategy. In this article, you will learn what is the difference between CLV and CP, how to calculate them, and how to use them to improve your marketing decisions.

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Anusha Thakur

Padma Shri Award Nominee - 2024 | Independent Researcher | Solo Research Papers without Ph.D. | Best Woman Researcher…

1 What is CLV?

CLV is the present value of the future cash flows that a customer will generate for a business over their entire relationship. It reflects the long-term potential of a customer and how much they contribute to the business's growth and profitability. CLV can be calculated using various methods, such as historical, predictive, or cohort-based, depending on the data and assumptions available. Generally, CLV is influenced by factors such as customer acquisition cost, retention rate, purchase frequency, average order value, and margin.

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Anusha Thakur

Padma Shri Award Nominee - 2024 | Independent Researcher | Solo Research Papers without Ph.D. | Best Woman Researcher Award (Below 35 years) | Shiksha Bharati Award | LinkedIn Top Voice| 3AI-Young Turks Award
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Customer Lifetime Value is the metric to measure the money spent by buyers on different services or products throughout their lifetime as a customer. Understanding CLV is pivotal for businesses as it helps to arbitrate the amount of money to be invested in the retention and acquisition of customers.

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2 What is CP?

CP is the difference between the revenue and the cost that a customer generates for a business in a specific period, such as a month, a quarter, or a year. It reflects the short-term profitability of a customer and how much they contribute to the business's bottom line. CP can be calculated by subtracting the variable and fixed costs associated with a customer from their revenue. Generally, CP is influenced by factors such as price, volume, product mix, service level, and discounts.

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Anusha Thakur

Padma Shri Award Nominee - 2024 | Independent Researcher | Solo Research Papers without Ph.D. | Best Woman Researcher Award (Below 35 years) | Shiksha Bharati Award | LinkedIn Top Voice| 3AI-Young Turks Award
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Customer profitability is the profit made by businesses by servicing a customer or customer group over a preordained period. It enables businesses to understand the difference incurred between the costs and profits for customer relations.

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3 How do CLV and CP differ?

CLV and CP differ in several ways. First, CLV is a forward-looking metric that estimates the future value of a customer, while CP is a backward-looking metric that measures the past performance of a customer. Second, CLV is a cumulative metric that accounts for the entire lifetime of a customer, while CP is a periodic metric that only accounts for a specific time frame. Third, CLV is a strategic metric that helps to allocate resources and optimize marketing campaigns, while CP is a tactical metric that helps to monitor and evaluate marketing results.

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4 Why are CLV and CP important?

CLV and CP are important because they help to understand the value and profitability of different customer segments and to make better marketing decisions. For example, by using CLV, you can identify your most valuable customers and target them with personalized offers, loyalty programs, and cross-selling or up-selling opportunities. By using CP, you can assess the effectiveness of your marketing activities and adjust your pricing, promotion, and distribution strategies accordingly.

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Anusha Thakur

Padma Shri Award Nominee - 2024 | Independent Researcher | Solo Research Papers without Ph.D. | Best Woman Researcher Award (Below 35 years) | Shiksha Bharati Award | LinkedIn Top Voice| 3AI-Young Turks Award
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Customer Lifetime Value helps businesses to facilitate the administering of marketing expenditures by guesstimating the profits generated by the relationship of any customer with a brand, thereby making better decisions. Customer profitability helps businesses to evaluate and understand how much a customer is valuable to them, and accordingly, decide upon the cost of retaining them.

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5 How to use CLV and CP together?

CLV and CP are complementary metrics that can be used together to gain a holistic view of your customer base and to optimize your marketing strategy. For example, you can use CLV and CP to segment your customers into four categories: stars, cash cows, question marks, and dogs. Stars are customers with high CLV and high CP, who are loyal, profitable, and growth drivers. Cash cows are customers with high CLV and low CP, who are loyal, stable, and low-maintenance. Question marks are customers with low CLV and high CP, who are new, risky, and high-potential. Dogs are customers with low CLV and low CP, who are unprofitable, declining, and resource-draining. By using this segmentation, you can tailor your marketing actions to each category and maximize your return on investment.

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6 How to improve CLV and CP?

Improving CLV and CP requires implementing various marketing strategies and tactics that focus on increasing customer satisfaction, loyalty, and retention. This includes offering high-quality products and services that meet customer expectations, providing excellent customer service and support, creating value-added content and experiences, building strong customer relationships and communities, developing loyalty and reward programs, implementing pricing and promotion strategies that balance customer value and profitability, and leveraging data and analytics to segment, target, and personalize marketing messages and offers.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What is the difference between customer lifetime value and customer profitability?

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1 What is CLV?

2 What is CP?

3 How do CLV and CP differ?

4 Why are CLV and CP important?

5 How to use CLV and CP together?

6 How to improve CLV and CP?

7 Here’s what else to consider

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