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 the metric that may, or may not, make sense. You want more on CLV? You will find a lot of bad advice out there.
A Simple But Wrong CLV
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 the metric is worth doing.
[An earlier version of the post complained about Hughes’ complex model. Back in 2017 I wrote ” 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.” I checked the spreadsheet now in 2021. It does not seem as bad as all that. I do not know whether it has been changed or I am just in a less grumpy mood now. The spreadsheet doesn’t highlight a CLV number which seems a significant flaw for a CLV spreadsheet. Still the row “individual LTV at NPV” is presumably aiming to do this.]
An Old Wrong Version Of The Formula
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 the version is dated as written in 2004. This was before much of the research on the topic was done. Unfortunately this bad advice featured high on searches well into 2017 and so presumably influenced the way people perform CLV calculations. (The site good news is that the site was down when I checked it in 2021. It was here if you want to check again, Larry Lim Customer Lifetime Value — The Key To Maximizing Your Profits http://www.marketingsphere.com/marketing-articles/customer-lifetime-value.html. So there is fractionally less bad ideas out there. Still much more bad advice has been posted since).
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/
For more on CLV see here