In order to compete effectively today, an organization must truly understand its customers and treat them as individuals. In order to do that, customer differences must be understood. Based on a customer's value, an organization can determine how much time and investment should be allocated to that customer. The key to keeping each customer is determining that customer's needs. If an organization acknowledges that each customer is unique, then it follows that some customers are more valuable than others. Customer lifetime value (LTV) expresses the stream of expected future profits, net of costs, on a customer's transactions, discounted at some appropriate rate back to its current net present value. But, profit on a customer's relationship with an organization is not just based on that customer's future purchases. An astute organization will also realize that each customer provides additional value through referrals of other customers, knowledge of other customers' tastes and preferences (as well as their own) and help in designing new products or services.
LTV is not a quantity that can be precisely calculated for any particular customer. Regardless of the sophistication of the modeling methods, it is not possible to factor in all of the variables, including nonquantifiable ones, such as the help a customer provides in designing a product. The purpose of LTV is to compare customers, and as information technology makes increasingly sophisticated modeling possible, LTV will become more accurate.
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