Measuring Customer Life Time Value for your Customers (CLTV)

Customer Life Time Value (CLTV) is important for retail markets. It is an essential metric to drive future success in retail markets. Retailers’ traditional value models are under threat. As price competition intensifies in many markets, churn rates rise and margins fall. This brings in a range of exciting opportunities, along with new competitors from technology, finance, automotive and telecoms - all keen for a share of the customer base. To avoid a race to the bottom, companies should rethink their acquisition and retention strategies, target setting and operational processes. This means focusing on customers who bring high lifetime value, through greater loyalty and a willingness to purchase additional products and services. However, embracing the customer lifetime value concept is a major shift, calling for cultural acceptance along with new data intelligence capabilities.

Concept of CLTV (Customer Life Time Value)

In a simple language CLTV measures the (expected) value of a customer. CLTV is the financial value of a customer based on the present value of her/his projected future cash flows, not just the current year’s contribution margin. Although there are many, increasingly sophisticated ways to calculate CLTV, its base formula (where variables remain constant over time) is:

CLTV = [(Revenue - Costs) X Retention] / [1 + Discount Rate - Retention]

Let me help you define the above terminologies for your understanding

Revenue: For retailers, it includes forecast future revenue from offline sales, online sales and other new services (Referral Customer Acquisition).

Retention: Calculated as 1 minus the (expected future) yearly churn rate. Estimated churn rates factor in the number of products consumed, the acquisition channel, churn rates of customers with similar characteristics.

Costs: Mainly include forecast cost of goods sold, cost-to-serve and cost-to-retain. Cost-to-acquire is usually included for acquisition strategies (e.g. in a channel strategy) but is often excluded for existing customers, as these are historic, sunk costs. Ideally, costs are calculated at an individual customer level, although it can be a challenge for retailers to make such data available.

Discount rate (weighted average cost of capital): Takes into account the time value of money and typically varies between 7-10 percent, depending on the specific market and the company size.

I will be coming with some applications purely based on marketing and strategy for your business. Till then Stay tuned.