Customer Lifetime Value (CLV) vs. Customer Lifetime Return on Investment (CLROI)

Elie  Ofek

Technical Note | HBS Case Collection | October 2014 (Revised November 2016)

Customer Lifetime Value (CLV) vs. Customer Lifetime Return on Investment (CLROI)

Abstract

This note presents two related measures for assessing the financial value of a customer to the firm. The first is the well-known measure of Customer Lifetime Value, or CLV for short. The second, which has received much less attention, treats the acquisition of a customer as a financial investment that has a quantifiable return based on future profit streams. Accordingly, we term this latter measure Customer Lifetime Return on Investment, or CLROI for short, and explain how it is calculated. We further show how employing CLROI can yield wildly different marketing implications relative to CLV (despite the strong link between them), particularly for targeting decisions. The note provides multiple examples to illustrate the concepts and also introduces formal characterizations of the two measures. The relevance of segment sizes, customer dynamics, social network influences, and strategic considerations are discussed.

Keywords: customer lifetime value; Return on investment; segmentation; marketing strategy; customer relationship management; social networks; Customer Relationship Management; Marketing Strategy; Investment Return; Social and Collaborative Networks;