Why Should an Organization Be Interested in Measuring Customer Lifetime Value?

by Neil Kokemuller Google

Small businesses often fail to consider the importance of understanding their customers. However, measuring lifetime customer value is vital to the long-term success of small businesses, just as it is for large corporations. Lifetime customer value provides a guide for marketing and building customer relationships.

LTV Basics

Lifetime customer value (LTV) is a metric that has become significant in the early 21st century with the rapid evolution of customer relationship management (CRM). CRM is the use of technology tools to collect and analyze customer data to target marketing and sales more efficiently. Additionally, CRM is about focusing marketing efforts on high value customers. Not all customers are equal. Therefore, companies need the ability to rank customers based on key data.

RFM Analysis

Recency, frequency and monetary value (RFM) are the three factors commonly used to measure lifetime customer value. Recency is how recently a customer has been in the store or made a purchase. Frequency is a measure of how often they visit or purchase. Monetary value is the dollar amount they spend with your company. Each factor is important in the overall measurement to gauge the consistent, active and high-volume purchasing behavior of your top customers.

Customer Pyramid

Small businesses typically have limited budgets. Some rely on just a few thousand dollars per year to attract and retain customers. Thus, it is important not only to rank and measure customer value, but to know what to do with the knowledge. Pareto's principle, a commonly accepted rule of business, states that roughly 20 percent of your customers provide 80 percent of your profits. Therefore, it makes sense for small businesses to focus much of their spending and attention on their core customers. The next tier of customers should also get some marketing attention. However, customers that do not offer much lifetime potential should not be the target of marketing investments.


Maintaining strong relationships with core customers is necessary for small businesses, especially in small marketplaces. While competing on price is often difficult for small businesses, competing on value-added products and services is possible. By monitoring customer activity and identifying top customers, you can enhance the quality of your relationships with your best customers. This typically leads to more repeat purchases and higher volume spending over time.

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