Marketers calculate and track customer-centered metrics to assess their performance, such as customer lifetime value customer equity. How are these two measures related?

Customer Lifetime Value (CLV) and Customer Equity are closely related metrics that both focus on the long-term value of customers to a business, but they operate at different levels of analysis. Here’s how they are connected:

1. Customer Lifetime Value (CLV)

• CLV measures the net profit attributed to the entire future relationship with a single customer.
• It calculates the present value of all cash flows a customer generates over their lifetime with the company.

   

2. Customer Equity

• Customer Equity is the total combined CLV of all the company’s current and potential customers.
• It represents the overall value of the company’s customer base and is often used to assess the firm’s long-term financial health.

How They Are Related

• CLV is the building block of Customer Equity. Customer Equity aggregates the CLV of all individual customers (or segments) to measure the total value of the customer base.
• Growth in CLV leads to growth in Customer Equity. Strategies that improve CLV (e.g., increasing retention, average spend, or reducing churn) directly enhance Customer Equity.
• Strategic Importance:
  • CLV helps marketers evaluate individual customer profitability.
  • Customer Equity helps assess the overall value of the business and guides decisions like marketing investments, acquisitions, or brand valuation.

Example

If a company has 1,000 customers, each with an average CLV of $1,000,itsCustomerEquityis$1,000,000. Improving CLV by 10% (to $1,100percustomer)increasesCustomerEquityto$1,100,000.