Chapter 11 Forecasting, Projections, and Customer Value

Future-oriented estimates are useful only when their assumptions and uncertainty are visible. This chapter distinguishes forecasts, projections, scenarios, and targets; compares major forecasting approaches; develops utilization-based projections; and builds customer lifetime value from revenue, gross margin, retention, churn, acquisition cost, and discounting.

Learning outcomes

After completing this chapter, you should be able to:

  • distinguish forecasts, projections, scenarios, and targets;
  • compare moving averages, regression trends, exponential smoothing, ETS, and ARIMA;
  • validate forecasting methods using time-ordered data;
  • construct population-utilization and scenario projections;
  • calculate and interpret revenue-based and margin-based CLV; and
  • incorporate retention, churn, acquisition cost, discounting, and uncertainty into customer-value analysis.

Key terms

  • Forecast: An estimate of a future value based primarily on patterns learned from observed data.

  • Projection: A conditional estimate of a future quantity under stated assumptions.

  • Scenario: A coherent combination of assumptions used to examine one possible outcome.

  • Forecast horizon: The number of future periods covered by a forecast.

  • Seasonality: A recurring pattern associated with a regular calendar or operational cycle.

  • Utilization rate: The number of events or services used relative to a defined population and period.

  • Retention rate: The proportion of eligible customers who remain active from one defined period to the next.

  • Churn rate: The proportion of eligible customers who end or fail to continue the relationship during a defined period.

  • Customer acquisition cost (CAC): The attributable cost of acquiring a new customer under a stated allocation rule.

  • Customer lifetime value (CLV): The estimated economic value produced by a customer over the relationship, under a stated revenue, margin, retention, cost, and discounting model.

  • Discount rate: The rate used to convert future amounts into present value.

  • Sensitivity analysis: An examination of how results change when important assumptions or inputs change.