What is a potential consequence of not understanding customer lifetime value (CLV)?

Understanding customer lifetime value (CLV) is vital for businesses as it provides insight into the long-term value that a customer brings to the company. If a business lacks a solid grasp of CLV, one significant consequence is the potential to overspend on customer acquisition. This occurs because without accurately estimating the value a customer will provide throughout their relationship with the business, companies may invest excessively in acquiring new customers—perhaps through costly marketing strategies—without a clear understanding of whether the future revenue from these customers will justify the expenses incurred.

By analyzing CLV, businesses can determine the maximum they should invest in acquiring customers while still maintaining profitability. Failing to do this can result in acquiring customers who do not generate sufficient revenue over time to cover the costs of acquiring them, thus harming the overall financial health of the organization. Hence, without this vital metric, the business risks misallocating resources and undermining its profitability strategy.