Customer Lifetime Value(CLV) or

(CLTV)
 CLV will answer questions like……
• Marketing: How much should I spend to
acquire a customer?
• Product: How can I offer products and services
tailored for my best customers?
• Customer support: How much should I spend
to service and retain a customer?
• Sales: What types of customers should sales
reps spend the most time on trying to
acquire?
• CLV is just a metric – not a strategy to attract
or retain customers
“CLV is a prediction of how valuable a customer
is going to be to your business over a specific
period of time”
• High-value customers have high CLV because
they bring money to you – resist “rewarding”
existing high-value customers with discounts
• Definition:

CLV is the net present value of the future cash

flows attributed to the relationship with a
customer.
Calculating CLV (Most simplest method)

______

Money Spent
Revenue Earned
- Acquiring and Serving

Example: The value of an average order at your business is

$50. Also, anytime someone makes an order, whether it's their
first or their third, they have a 10% chance of coming back and
making a repeat purchase.
Finally, assume that it costs you $15 to acquire each new
customer.
• The total revenue you can expect to get from
each customer is your average order value
divided by one minus the repeat purchase
rate, or $50 / ( 1 - 0.1) = $55.56.
• Subtract your customer acquisition cost from
that, and you get a customer lifetime value of
$40.56.
 Potential CLV measures include:
• Future lifetime value: The expected future value of an
existing customer at a specific point in time
• Past lifetime value: The past value of an existing
customer until this point in time
• Value at Risk from churn: The difference between the
value of a customer assuming no churn and the
expected value allowing for the probability of churn
• Acquisition lifetime value: The expected value of the
customer at the time of acquisition, including
acquisition costs specific to the distribution channel
• Expected cross-sales lifetime value: The expected
lifetime value resulting from cross-sales
Business Model
• An Internet Service Provider charges $19.95
per month. Variable costs are about $1.50 per
account per month. With marketing spending
of $6 per year, their attrition is only 0.5% per
month. At a monthly discount rate of 1%,
what is the CLV of a customer we intend to
acquire?

$M = $19.95 -$1.50 = $18.45

$R = $6/12
= $0.50
r = 0.995
d = 0.01
 Solution
CLV = [$M –$R] x [(1 + d)/(1 + d -r)]
CLV = [$18.45 –$0.5] x [(1+.01)/(1+.01-0.995)]
CLV = [$17.95] x [67.333]
CLV = $1,209

The resulting figure of $1,209 is composed of two terms:

the net contribution per period of $17.95 and a multiplier of 67.3.

This multiplier is a function of the retention rate and the discount rate.
The high retention rate produced this high multiplier of 67.3 leading to
the relatively high CLV of $1,209.

While the ISP only makes $17.95 per period, the discounted value of
the expected “annuity” of these payments total 67.3 times the per
period amount.
• If the firm cuts retention spending from $6 to
$3 per year, they expect attrition will go up to
1% per month. Should they do it?
• An Internet Service Provider charges $19.95 per month.
Variable costs are about $1.50 per account per month. With
marketing spending of $3 per year, their attrition will be 1%
per month.At a monthly discount rate of 1%, what is the
CLV of a customer?

$M = $19.95 -$1.50
= $18.45
$R = $3/12
= $0.25
r = 0.99
d = 0.01
• Solution:

CLV = [$M –$R] x [(1 + d) / (1 + d -r)]

CLV = [$18.45 –$0.25] x [1+.01)/(1+.01-0.99)]
CLV = [$18.2] x [50.5]
CLV = $919

Completing the calculation shows that the new CLV

would be $919.

The new CLV is LOWER. The savings in retention

spending is NOT worth the increased attrition. The
firm should stick with the $6 retention spending.
Since $919 is LESS than $1,209, the proposed
change is not attractive.
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