CLV Note (Chapters 1-2)

Question 1

What is Customer Lifetime Value?

Answer 1

• Quantifies how much a customer is worth to a firm
• Net present value of the stream of future profits the firm can expect over the customer’s lifetime purchases
• Pretty confidential

Question 2

How to calculate the CLV

Answer 2

• Firm subtracts:

(Expected profits) - (Expected costs of attracting, selling and servicing the account, applying a discount rate that reflects the cost of capital and risk)

Question 3

CLV Formula

Answer 3

• Infinite time horizon, which avoids having to select an arbitrary time horizon for calculating CLV
• On a per customer basis:

[CLV = m(r/(1+i-r))]-AC

• Without -AC, it’s absolute CLV
• With -AC, it’s relative CLV

Question 4

Components of CLV Formula

Answer 4

• m = margin or profit
  — if not given:
  1. m = revenue x profit contribution %
  OR
  2. revenue - costs to serve the customer
• r = retention rate
  — percent of customers who remain with the firm
  OR
  — if given the defection or churn rate: r = 100% - churn rate
  — churn rate is he customers that leave company and become unloyal
• i = discount rate
• AC = acquisition costs
  — costs to acquire the customer
  — ex) email marketing, television ads

Question 5

Example: MoreTV, a streaming subscription service, spends an average of $6 to acquire each new customer. The annual subscription fee is $75 per customer and it costs $15 per year to service the customer. A typical customer’s re-subscription rate dwindles by about 15% each year. Assuming a 10% discount rate, what is the lifetime value f a typical customer for More TV?

Answer 5

AC = $6
m = $75 - $15 = $60
i = 0.1
r = 100% - 15% = 85% = 0.85

CLV = m(r/(1+i-r)) - AC
CLV = 60(0.85/(1+0.1-0.85)) - 6
CLV = $198

Question 6

How to increase a negative CLV:

Answer 6

1) Decrease acquisition costs
— risk: won’t get as many customers, so revenue decreases

2) Increase profit margin
— increase how much products actually cost

3) Increase retention rate
— could have loyalty program
— ex) Peloton and Zoom CLVs began falling after pandemic since customers didn’t need their products as much