Assignment-2

Name: Nurul Islam

ID: 1835221660

How to calculate Customer Lifetime Value?

Well, it is known that customer lifetime value is the metric that indicates the total revenue a
business can reasonably expect from a single customer account. It considers a customer's revenue
value, and compares that number to the company's predicted customer lifespan. Businesses use
this metric to identify significant customer segments that are the most valuable to the company.

By calculating customer lifetime value we can also gain a more accurate sense of the value to
assign to our conversion metrics. For example, we will know what it’s really worth to secure a
lead with our online advertising programs. This can help us evaluate our marketing spend.

Let’s take a numerical example

To calculate customer lifetime value we need to calculate average purchase value, and then
multiply that number by the average purchase frequency rate to determine customer value. Then,
once you calculate average customer lifespan, you can multiply that by customer value to
determine customer lifetime value.
The average sales in a grocery store are $70 and, on average, a customer shops four times every
two years. The lifetime value is calculated as LTV = $70 x 4 x 2 = $560

Furthermore, the profit margin in the grocery store is 20%, hence the CLV is as follows: CLV =
$70 x 4 x 2 x 20% = $112.

This calculation reveals the customer lifetime value of the average customer is $112— far less
than the lifetime value calculated above. As a retailer, this number is used to project cash flow and
to understand how many customers you must acquire and retain to reach desired profitability.

The lifetime value figure can help a business estimate future cash flows and the number of
customers they need to obtain to achieve profitability. CLV emphasizes that value is derived from
the customer relationship. This emphasis orients the firm towards the customer, enabling a
customer-centric business culture. Customer-centricity is contrasted with product or service-
centricity. Customer lifetime value is used in marketing for the purposes of customer selection,
resource allocation and marketing campaign design. It is sometimes used in finance to derive the
value of customer equity (CE), an important driver of firm value.
The best way to think about the role of the retention rate in the customer lifetime value calculation
is to consider that it estimates the percentage probability of the firm receiving the customer’s
revenue in future years.