11.10 Customer lifetime value
CLV translates customer behaviour into a long-term economic measure. It can support acquisition spending, retention priorities, segment strategy, service design, and evaluation of customer relationships. The formula must match the decision and available data.
CLV is not one universal formula. Different models answer different questions and require different assumptions (Gupta et al. 2006).
11.10.1 Introductory revenue CLV
A simple revenue-based model is
\[ \text{Revenue CLV} =(\text{average purchase value}) \times(\text{purchases per period}) \times(\text{customer lifespan}). \]
This version is useful for understanding the role of value, frequency, and lifespan. It should not be called profit because it ignores cost, margin, acquisition, retention variation, and the time value of money.
11.10.2 Margin-based CLV
An improved model uses contribution margin:
\[ \text{Margin CLV} =(\text{average revenue per period}) \times(\text{contribution margin rate}) \times(\text{expected active periods}) -\text{CAC}. \]
Define which costs are included in contribution margin. Gross margin, contribution margin, and operating profit are not interchangeable.
11.10.3 Retention and churn
For a closed cohort over one period,
\[ \text{Retention rate} =\frac{\text{eligible customers retained}}{\text{eligible customers at the start}}. \]
When every eligible customer is either retained or lost,
\[ \text{Churn rate}=1-\text{Retention rate}. \]
New customers should not be included in the retention numerator. Net customer growth is a different measure:
\[ \text{Net growth rate} =\frac{\text{new customers}-\text{customers lost}} {\text{customers at the start}}. \]
The approximation (1/) is sometimes used for expected lifespan under a constant independent churn process. It is not a universal identity. Churn often changes with tenure, segment, contract type, and period.
Do not convert annual churn to quarterly churn by simply dividing by four when compounding matters. Under a constant quarterly retention assumption,
\[ r_{quarter}=r_{annual}^{1/4}, \qquad c_{quarter}=1-r_{annual}^{1/4}. \]
11.10.4 Discounted CLV
Future contribution is worth less than contribution received today. A flexible finite-horizon model is
\[ CLV=-CAC+\sum_{t=1}^{T} \frac{M_tS_t}{(1+d)^t}, \]
where \(M_t\) is expected contribution margin if active in period \(t\), \(S_t\) is the probability of remaining active at the start of that period, \(d\) is the discount rate per period, and \(T\) is the horizon.
Worked Example: Calculating Discounted Membership CLV
NVRW estimates annual contribution margin of $144 for a new membership, annual retention of 75 percent, a four-year horizon, an annual discount rate of 8 percent, and CAC of $75. The customer is active in year 1, so survival probabilities are \(1\), \(0.75\), \(0.75^2\), and \(0.75^3\).
\[ CLV=-75+ \frac{144}{1.08}+ \frac{144(0.75)}{1.08^2}+ \frac{144(0.75^2)}{1.08^3}+ \frac{144(0.75^3)}{1.08^4}. \]
The estimated CLV is approximately $260. The result is conditional on the margin, retention, discount, horizon, and CAC assumptions. It should be compared with alternative assumptions rather than presented as an exact customer value.
11.10.5 Cohorts and segments
Average CLV can hide meaningful differences. Compare cohorts defined by acquisition period, channel, membership type, or another characteristic known at the relevant decision time. Ensure every cohort has enough follow-up. Recent cohorts should not appear to have lower lifetime value merely because less time has passed.
Segment-level CLV should not encourage the organization to neglect low-value groups when it has public-service, access, or fairness obligations. Economic value is one decision measure, not a complete statement of social or organizational value.
11.10.6 CLV in Excel
An auditable spreadsheet should separate inputs, yearly calculations, and outputs. A row for year \(t\) can contain:
- survival probability;
- expected revenue;
- contribution margin;
- discount factor;
- present value; and
- cumulative CLV after CAC.
For a yearly contribution in cell C8, survival probability in D8, discount rate in $B$3, and year in A8, present value can be calculated as:
=C8*D8/(1+$B$3)^A8Use typed numeric cells for rates and currency. Do not hide assumptions inside long formulas.