Customer Lifetime Value (CLV) is widely discussed in marketing. Unfortunately, given marketers rarely refer to anyone else’s ideas this just leads to lots of people having their own view. This means when one looks up CLV online you are very likely to get a view of CLV that may, or may not, make sense.
David Hughes gives a very simple CLV on Avinash Kaushik’s Occam’s Razor site. To be fair he does give more detail in a spreadsheet but neither the simple nor complex models he gives work in my opinion. The simple formula ignores discounting. This seems to be a significant managerial oversight — CLV is only really worth calculating when lifetimes are long and if this is the case discounting seems essential. Discounting is necessary whenever CLV is worth doing.
Hughes’ complex model also has problems. For example, as far as I can tell, the complex model seems to give an annual LTV figure. This is a mistake that I see students making which just leaves me confused. An annual lifetime value figure isn’t a lifetime value figure unless lifetimes are 1 year which seems a coincidence in most analysis. I strongly advise never suggesting that an annual figure is a lifetime value figure if one doesn’t want to simply confuse everyone.
Larry Lim’s approach detailed on Marketing Sphere seems even more confusing. This formula ignores discounting, and has some ambiguous references to profit. The approach seems to be based upon dividing the profit by the number of customers. To be fair this version is dated as written in 2004, before much of the research on CLV was done. Still, it is unfortunate that this website still features high on searches, and so presumably influences the way people perform CLV calculations.
Understanding the financial value of your customers makes a lot of sense. I hope that we can get it more standardized. If everyone uses their own formula one never really knows what any CLV figure means.
Read: David Hughes Solve tomorrow’s problems today – introducing Life Time Value at https://www.kaushik.net/avinash/analytics-tip-calculate-ltv-customer-lifetime-value/
Larry Lim Customer Lifetime Value — The Key To Maximizing Your Profits http://www.marketingsphere.com/marketing-articles/customer-lifetime-value.html