A useful method in the marketer’s toolkit for determining the value of a representative customer from a certain segment is customer lifetime value (CLV). A CLV analysis essentially summarizes the profit generated by an average customer in the past and projects this information into the future to guide managerial decisions. This technical note focuses on the more technical aspects of CLV analysis and demonstrates three common methods of calculating CLV using the same underlying dataset of individual purchases. Specifically, this note will provide equations and examples calculating CLV based on (1) individual-level purchase data, (2) aggregate data with profit and retention rates that vary, and (3) aggregate data with the assumptions that profit is predictable and consistent (e.g., subscription-based purchasing behavior) and that the retention rate is constant.
We recommend pairing this with another note that provides a more in-depth conceptual introduction to CLV and its managerial implications: “A Conceptual Introduction to Customer Lifetime Value” (UVA-M-1053).
