Measuring Customer Lifetime Value (CLV)

Customer Lifetime Value (CLV)

CLV is Future Cash Flows

What is your customer worth? Like most relationships, a business relationship with a customer is based on the lifetime of that relationship. Customers and vendors are no different. Customer Lifetime Value (CLV) is just that – determing the typical value that the customer generates for your company. It is derrived from multiplying the average purchase price with the average number of purchases over the lifespand of the customer relationship.

Avoid Common Pitfalls

CLV is not a Maximum

When analyzing your CLV, strategists need to remember that this is what has been done in the past. If your attempting to influence frequency of repurchase and repurchase value, CLV isn’t the maximum lifetime cash flow but simply a minimum.

In order to growt CLV, strategists should focus on delievering more of what customers want in terms of upsell and cross-selling. Below are some straight-forward ideas to take action based on CLV:

• What is the customer’s perception of the value of the entry-level purchase?
• Which SKU’s are typically purchased in conjunction and in what order?
• Have you asked customers what a natural next step they would purchase from you?

Discounting

If this sounds like a simplified net present value (NPV) calculation, it’s because it is. Discounting future revenue is a good idea, if you can determine WHEN they appear. Subscription models make this more predictable, but other business models might experience a bit more volatility – making discounting fucntionally impossible.

Model Underspecificaiton Risk

Retrieving a data model that supports CLV could leave you without any actionable steps to take. Including only a dollar figure doesn’t give you much to go off of. Adding a couple of dimensions such SKU, PURCHASE_DATE can make a real difference to any query and will give you a much clearer insights into what is driving the CLV.

--UNDERSPECIFIED MODEL
SELECT CUSTOMER, SUM(AMOUNT)
FROM SALES
GROUP BY CUSTOMER;

--BETTER SPECIFIED MODEL
SELECT CUSTOMER, SKU, PURCHASE_DATE, QUANTITY, PRICE, QUANTITY * PRICE
FROM SALES
ORDER BY PURCHASE_DATE ASC;

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