Calculating Customer Lifetime Value

Customer lifetime revenue is the total amount of revenue that a customer is likely to get in for the company.

The computation of the customer lifetime revenue is relatively easy:

Customer lifetime revenue = average purchase amount x purchase frequency in a year x number of years customer is expected to stay

or in exponential form with a yearly discount rate

CLR = Total Revenue per client * (r/(1+d))

where r is the retention rate and d is the discount rate.

It is also important to keep in mind that if your product has serviced the customer well, there is a likely chance that the estimated volume of purchase per cycle and therefore the estimated average amount per purchase occasion increases over time. However, this is something that also depends on the category in question. The number of sanitary pads that a woman purchases in a month is not likely to increase just because she is satisfied with the product. However, the share of wallet on some multi brand categories is likely to increase over time with higher levels of customer satisfaction.

Customer Lifetime Value
Simply put, customer lifetime value of a customer can be defined as the value of the customer to the business. This pertains to the total value that the customer can bring to your business across a specific period of time. Factors that need to be taken into account to calculate the lifetime value of a customer include the amount of money being spent on the customer for acquisition and retention. In addition to that there is also the aspect of the referral value of a satisfied customer in terms of good word of mouth. The lifetime value of a customer therefore needs to be a summation of the profit that she or she is likely to bring to the business and the referral value too.

Computing the lifetime value of customer is not easy. It needs to take various aspects into consideration.
Estimated customer lifetime value – (Customer lifetime revenue – customer lifetime cost) + expected number of referrals x expected value of the referred customers)

Some businesses however do not like to add in the referral value of a customer in the overall computation since it can bring in duplication over a period of time. Therefore the calculation is limited to:

Estimated customer lifetime value – Customer lifetime revenue – customer lifetime cost

The customer lifetime cost can be calculated by looking at the profit per sale and the number of times purchase has been made.
Knowing the customer lifetime value helps in assessing the amount of money that you should be spending on certain segments of customers in order to retain them. It helps in ensuring that the return on investment of specific customers is high and in accordance with the kind of returns that the company is looking at.

A company can use the values of lifetime value by categorizing people into various groups based on the level of lifetime value – high medium and low. These people can be profiled based on their categorizations and once you know the specific types of people in each group, the company shall be in a better position to spend the marketing budget in the right direction. This data can also be used to plan invites to high profile events and loyalty programs.

Customer Lifetime Value or CLV is one of the best ways in which the objectives of the company can be defined for the year. Defining the company objective based on CLV can help in ensuring that the future of the company is also being taken into account and that the marketing strategies being developed are not merely short term and tactical.

Efforts of the sales force can also be defined in keeping with the customer lifetime value so that you can be sure that you are keeping the high value customers happy and content.