What is Customer Lifetime Value (CLV, LTV)?

March 17, 2010

Lifetime Value concept refers to the value of a customer over it's lifetime.  Simply formulated

Formula for calculating lifetime value (LTV) Formula for calculating lifetime value (LTV)

Margin:  is the net product contribution margin (net of returns) plus other related margin from the customer (shipping, service charges etc), minus all the promotional costs that will be incurred in the customers lifetime.r: Expected retention rate of customeri: Weighted average cost of capital, basically the discount rate to be used in bringing the future value of customer to todayg: growth rate of retained customersACQ:  Cost of acqusition Some important things to consider to understand this before I talk about it's usage or significance.

1) Lifetime Value is a future value of customers, not past or present value.  Although the two are often very much correlated (another topic)

2) The acquisition cost (ACQ) can either be used or not depending on the situation.  For example if you're trying to decide between acquisition sources, then use it, since it provides a value comparison between sources prior to acquiring a customer.  If the customer is already acquired and you're projecting their value for differentiating service, promotional targeting etc. then you should not use it.  Since the customer is already acquired and the acquisition cost is a sunk cost