ABDULLAH MUGHAL 22-10325

CUSTOMER LIFETIME VALUE CALCULATION

SIMPLE EXAMPLE:

 Profit generated by the customer each year = $5,000

 Number of years that they are a customer of the brand = 10 years
 Cost to acquire the customer = $7,000
The customer lifetime value of this customer would be:
$5,000 (annual profit from the customer) X
10 (number of years that they are a customer) less
$7,000 (acquisition cost) = $43,000= CLV.
That is, $5,000 X 10 – $7,000 = $43,000

DETAILED EXAMPLE:
 annual revenue per average customer is $6,000 per annum
 product costs associated with the average customer’s purchases is $900 per year
 the firm also spends $400 a year per customer to provide customer service
 annual retention rate (loyalty rate) is 60%
 average costs to acquire a new customer are $2250
Our first step here is to calculate the average annual profit per customer – which is
determined by deducting the two sets of costs (product costs and service costs) from the
annual revenue. In this case, it is $6000 – $900 – $400 = $4,700
We have acquisition costs provided for us ($1,000), but unfortunately we do not have the
average lifetime of the customer in years – we only have the annual retention rate. This will
be a common situation in a workplace, as it is relatively easy from a customer database to
calculate retention rates. So our challenge is now to convert a retention rate to the average
number of years that the customer will deal with the firm.
It is quite easy to calculate the customer lifetime in years from a retention rate, as follows:
100% divided by (100% minus the annual retention rate)
OR (1 / 1- annual retention rate)
So in this example of an 60% loyalty rate, the average customer lifetime would be:
100% / (100% -60%) =
100% /40 % = 2.5 years average customer lifetime period
Now we have all the inputs into the simple customer lifetime value formula, we can then
calculate CLV as:
CLV = $4,700 (profit) X 2.5 (years) – $2,250 (acquisition) = $9,500