Statistical Methods in Customer Relationship Management

8.2 CLV Measurement Approach

CLV is defined as the ‘sum of cumulated future cash flows – discounted using the weighted average cost of capital (WACC) – of a customer over their entire lifetime with the company’ [1]. In this regard, CLV can also be referred to as the net present value of future cash flows from a customer. Increasingly, adoption of CLV and CLV-based strategies are being well accepted by marketing practitioners, due to its forward-looking component, unlike the traditional measures of profitability.

When computing CLV, managers have to consider the setting in which the customer purchases are being made, that is, contractual and non-contractual. A contractual setting is one where the customers are bound by a contract such as a mobile phone subscription. On the contrary, in a non-contractual setting the customers are not bound by a contract such as grocery store purchases. That is, in a contractual setting, the firm gets fixed monthly revenue through the subscription and observes when churn occurs (i.e., when the subscription is cancelled). But the observation of the churn would be missing in a non-contractual setting. Therefore, these differences will have to be included while computing CLV. To cover both situations, CLV can be expressed in the following form:

(8.1)

where:

CLV_i = lifetime value for customer i

= predicted probability that customer i will purchase additional ...