Marketing Management, 16th Edition

Measuring Customer Lifetime Value

Customer lifetime value is typically calculated as the net present value of the stream of future profits expected over the customer’s lifetime purchases.65 The company must subtract from its expected revenues the expected costs of attracting, selling, and servicing the account of that customer, applying the appropriate discount rate (say, between 10 and 20 percent, depending on cost of capital and risk attitudes). Lifetime value calculations for a product or service can add up to tens of thousands of dollars or even run to six figures.

Customer lifetime value calculations provide a formal quantitative framework for planning customer investment, and they help marketers adopt a long-term perspective. Researchers ...