CLTV

Customer Life Time Value (CLTV)

Customer Life Time Value (CLTV) is a metric to measure customer value to an organization. Everyone understands and accepts that different customers add different value to the organization, but do not know how much. And historical profitability contribution of the customers may not right metric to understand the future profitability and value of the customers.   For example, a young customer recently acquired by a bank may not be contributing much to the profitability, but has huge potential to add value to the bank. Hence it is important for marketing managers to measure future value of the customers along with current profitability to formulate right marketing strategies.

Customer Life Time Value (CLTV) measures future value of the customers.  Since, CLTV requires estimation of customer value at different future time period, a time value of asset (customer value) is considered using Discounting Factor. The discounting factor is a commonly used concept in Finance for Cash-Flow analysis. The Discounting Factor will help is calculating Net Present Value (NPV) of the customers and net present value is defined as CLTV.  The CLTV may be measured at a customer or segment level depending on complexity involved and sophistication required.

CLTV Calculations

CLTVi                     = ∑ (Vi)/(1+d)t

Where

Vit           – Value for Customer i and for time period t

d             – Discounting factor

t              – Time period index

i               – Customer index

CLTVi        – Customer Lifetime Value for customer i

Application of CLTV

  • Business Valuation
    • Estimating future value of a portfolio – credit card  or insurance portfolio
    • Assessing impact of economic conditions on a portfolio valuation
    • Formulating Business Strategies
      • Allocating Marketing Budget across media vehicles
      • Optimal allocation of Spend and focus across Customer Acquisition and Retention
      • Optimal Sales Reward Structure
      • Structuring Customer Servicing based on customer value to increase customer loyalty

Customer Life Time Value (CLTV) for Retail Bank with an example