Customer Marketing – Customer lifetime value
Customer marketing > Customer value > Customer lifetime value – explaining the basic calculation
Mathematically expressed, calculating customer lifetime value (CLTV) starts with your current year net revenue per customer. Then you’ll need to take this currency total, and discount it for next year by your customer churn rate (loss rate), and by the interest rate which acts as a proxy for the cost of capital:
GY0 x (1-C) x (1-I) = GY1
Where G = your current year gross marginal contribution per customer in currency, C = your customer churn rate as a percentage, I = the interest rate as a percentage
This gives you the discounted value of your customer to your business for next year. Then you’ll need to take this currency total, and discount it again for subsequent years in the same way:
GY1 + (GY1 x (1-C) x (1-I))
Then you’ll carry out the same process for future years, discounting your new currency total in every round:
CLTV = GY1 + GY2 … + GYn
It’s usually best to stop at year 5 because the discounted revenue for year 6 and beyond usually becomes too small to be worth adding. As an approximate value, you’ll find that the CLTV will be about three times your current year total.
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