Limitations of CLV

• This model for customer cash flows treats firms' customer

relationship as a leaky bucket. In each period a fraction of firms
customer leave and are lost for good.
• CLV model has 3 parameters
• constant margin (contribution after deducting variable costs including
retention spending) per period.
• constant retention probability per period
• discount rate
• The model assumes the 1st margin will be received (with probability
equal to retention rate) at the end of 1st period.
• The model assumes infinite horizon to calculate cash flows when no
firm actually has an infinite horizon.
• Retention rate is an important driver of CLV. Small changes can make
significant impact of CLV. Accuracy of this parameter is vital to
meaningful results.
• Margin taken here is constant which is likely to increase or decrease
How does CLV differ from traditional metrics
Metrics like RFM,SOW,PCV are backward looking and do not take into account
future revenues and future costs of servicing customers (depending on how
long customers will be active)

CLV takes into account the probability that the customer will be active in the
future and thus future revenues as well as the costs of marketing to customers
in order to retain them.

Customer acquisition costs apply to new customers. Acquisition costs can be

free trial period, sign up incentives etc.
Acquiring customers can be expensive.