Interpreting Customer Lifetime Value

Topics

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

Teaching Notes

  • Preferred format: This teaching activity can be run individually or in student pairs.
  • Student audience: This discussion exercise is more suitable for advanced students studying services marketing, 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

Your task of this customer lifetime value activity is to compare the following two measures of customer lifetime value for two different firms (Firm One and Firm Two). Below is the output from an online customer lifetime value calculator for both of these firms.

As you will know, customer lifetime value (CLV) is calculated using the following formula:

  • Annual profit contribution per customer (for each year) multiplied by
  • % of customers retained each year, then less
  • The initial cost of customer acquisition
  • With each yearly figure adjusted by an appropriate discount rate

Firm One’s Customer Lifetime Value calculation

example clv calculation

Firm Two’s Customer Lifetime Value calculation

output from the CLV calculator

How to Read the Customer Lifetime Value Output

The top white section of the calculator is the input and the bottom gold section is the output.

  • Two customer lifetime value numbers have been provided, with the second one takes into account the discount rate.
  • IRR is the internal rate of return, which is the average percentage return on the acquisition cost over time.
  • Payback is the number of years taken to recover the acquisition cost of the customer
  • The simple ROMI is the customer lifetime value (without discounting) divided by the acquisition cost.
  • And the present value ROMI is the customer lifetime value (with discounting) divided by the acquisition cost.

Student Discussion Questions

  1. Which company has the more impressive customer lifetime value calculation? Which metric/s did you consider to draw this conclusion?
  2. What are the key differences between the two firms, based on the elements of the customer lifetime value calculation?
  3. What elements do you suggest that these firms work on in order to improve their customer lifetime values?
  4. Are the additional financial metrics provided at the bottom (e.g. internal rate of return and payback) helpful of distracting in distinguishing between the two firms performance?

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.