Calculating Customer Lifetime Value (CLV): Theory and Practice

Abstract

This paper examines the calculation of customer lifetime value (CLV). Two case studies from Australasian practice are used to describe how CLV is calculated. These case studies reveal that customer retention rates, customer acquisition costs and the present value of future expected base profits are incorporated into the calculation of CLV. Other drivers of CLV, such as revenue growth, cost savings, referrals and price premiums, were not significant in this examination of practice. Practitioners indicated that these other drivers were not used for two reasons: first, they were unable to readily quantify them; and second, they expressed doubts as to their significance. In brief, it appears that practitioners are developing simple and feasible representations of CLV to use in business decision-making.

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