Calculating Customer Lifetime Value (Impact of Future Years)

Topics

customer lifetime value, CLV, customer relationship management, analysis, services

Teaching Notes

  • Preferred format: This teaching activity can be run in student pairs in small groups.
  • Student audience: This discussion exercise is more suitable for advanced students studying CRM, strategy, or marketing metrics.
  • Exercise time: This activity will probably run around 20-30 minutes.

Review the activity below or download the PDF student worksheet


Student Discussion Task

In this exercise, your task is to calculate the customer lifetime value (CLV) for two retailers (there is one example already being provided to assist you).

In the activity, we will also consider the impact of the number of years (that is, the customer’s lifetime) in the calculation.

In the following tables, the formula to calculate customer lifetime value is:

CLV =             {(annual revenue – annual costs) X years a customer} less initial acquisition costs

Please note: The first table uses several years for the lifetime period, whereas the second table assumes that the customer only deals with the firm for one year only.

 

PART A

Looks at Future Years

Example

Retailer A

Retailer B

Annual Revenue

$500

$3,000

$1,100

Annual Costs

$100

$1,000

$100

Years a Customer

5 yrs

5 yrs

3 yrs

Acquisition Cost

$500

$2,000

$500

CLV

$1,500

PART B

Looks at One Year Only

Example

Retailer A

Retailer B

Annual Revenue

$500

$3,000

$1,100

Annual Costs

$100

$1,000

$100

Years a Customer

1 yr

1 yr

1 yr

Acquisition Cost

$500

$2,000

$500

CLV

– $100

Student Discussion Questions

  1. Complete the calculations for the two retailers. In the top table (Part A) you will calculate CLV using multiple years, whereas in the second table (Part B) the customer stays for only one year.
  2. Which of the two retailers have the more valuable customers – based on the top table (Part A) only?
  3. Now which of the two retailers have the more valuable customers – based on the second table (Part B) only?
  4. Based on this, what impact does the lifetime (number of years) figure have on the overall calculation?
  5. Therefore, how important is it for firms to try and enhance customer loyalty (that is, years a customer)?
  6. Based on the information shown, would the retailers benefit more from:

a.         Trying to acquire customers more efficiently (that is, a better use of their promotional mix) OR

b.         Trying to extend customer loyalty (that is, hold customers for an extra year)?


Related Activities

Customer Lifetime Value Calculation (a step-by-step guide)

Calculating Customer Lifetime Value (Basic Formula)

Justifying Marketing with Customer Lifetime Value

Working with Customer Lifetime Value

Additional External Resources

Link to the free online CLV calculator, ideal for students to play around with.

Plus here is an example customer lifetime value calculation.