In Customer Relationship Management (CRM)what is lifetime value of customer? The definition states...The potential profit generated by a single

customer’s purchase of a firm’s products over the customer’s lifetime.
I am not understanding this fully

A financial advisor explained to me today his philosophy of business. He gives his clients the best service he can. In that way he keeps his clients for a long time. These satisfied clients are also likely to refer other potential clients to him.

The lifetime value of a customer, in the context of Customer Relationship Management (CRM), refers to the estimation of the potential profit generated by a customer throughout their entire relationship with a company. It is calculated by analyzing the customer's purchasing behavior, including the frequency of purchases, the average order value, and the duration of their relationship with the company.

To understand this concept more fully, let's break down the definition:

1. Potential profit: This refers to the total revenue generated by a customer's purchases, minus any associated costs or expenses.

2. Single customer's purchase: It means that the lifetime value focuses on the transactions made by an individual customer, rather than aggregating the profits of all customers.

3. Over the customer's lifetime: Rather than focusing on a single transaction or a short-term period, the lifetime value takes into account the entire duration of the customer's relationship with the company. It considers the continued revenue potential over time.

Calculating the lifetime value of a customer involves analyzing various factors such as the average purchase frequency, average order value, and average customer retention period. These metrics help in estimating the potential revenue generated by the customer over their lifetime.

Understanding the lifetime value of customers is important for businesses because it helps them make informed decisions regarding customer acquisition, retention, and loyalty strategies. By identifying high-value customers and investing in building long-term relationships with them, companies can maximize their profitability and allocate resources more effectively.