customer lifetime value (clv)
DESCRIPTION
A primer on CLV, which is a predictor of net profit attributed to the aggregated future relationship with a customer-derived from wikipedia.TRANSCRIPT
Customer Lifetime Value (CLV)
(Avg Monthly Revenue per Customer * Gross Margin per Customer) ÷ Monthly Churn Rate
Where GC is yearly gross contribution per customer, M is the (relevant) retention costs per customer per year (this formula assumes the retention activities are paid for each mid year and they only affect those who were retained in the previous year), n is the horizon (in years), r is the yearly retention rate, d is the yearly discount rate. In addition to retention costs, firms are likely to invest in crossselling activities which are designed to increase the yearly profit of a customer over time. It is often helpful to estimate customer lifetime value with a simple model to make initial assessments of customer segments and targeting. Possibly the simplest way to estimate CLV is to assume constant and longlasting values for contribution margin, retention rate, and discount rates, as follows:[9]