On November 29, 2011 we posted a “back of the napkin” guide for calculating the economic value a customer brings over their “lifetime” with a business. We designed Understanding Customer Lifetime Value: A Non-Geek’s Guide as a thorough, yet non-academic, approach to determining the lifetime value of customers The step-by-step process of determining customer lifetime value seemed like a natural fit for SlideShare, so we decided to re-release the post in a presentation format. Check out What Is a Customer Worth to learn more about Customer Lifetime Value and to make better decisions about marketing and retention.

1. Understanding Customer Lifetime Value

2. ©Copyright 2013. CTS Service Solutions. All Rights Reserved.
By Adam Toporek
July 22, 2013
On November 29, 2011, we posted
Understanding Customer Lifetime
Value: A Non-Geek’s Guide, an
extensive look at the non-academic
approach to Customer Lifetime
Value.
This SlideShare presentation breaks
the CLV concept down step-by-step.

3. What Is
Customer
Lifetime Value
and Why Is It
Important?

4. Customer Lifetime Value (CLV)
attempts to determine the
economic value customers bring
over their “lifetime” with the
business.

5. At the heart of understanding CLV
lies the recognition that a customer
does not represent a single
transaction but a relationship that is
far more valuable than any one-
time exchange.

6. Understanding CLV is incredibly
important for customer service
professionals and for
businesses of all types. Why?
Because if you don’t know what
a client is worth, you don’t
know what you should spend to
get one or what you should
spend to keep one.

7. Why a Non-
Geek Guide to
Customer
Lifetime Value?

8. Often, statistically
sound approaches
are not feasible.
Sometimes the
back of the napkin
is all we have.
The Customer Lifetime Value calculation can
be an extremely complex undertaking.

9. Breaking Down CLV
Let’s begin by taking a look at the
major components of Customer
Lifetime Value…

10. Calculating The
Profit of an
Average
Transaction

11. Unit Contribution Margin
The tendency when
thinking about the lifetime
value of a customer is to
focus on the revenue the
customer brings in over
their lifetime.
However, focusing on
revenue will almost always
overstate the value of the
customer.

12. Marginal Profit
The more accurate way to
measure is to focus on
what is known as the Unit
Contribution
Margin, which we’ll call
marginal profit for short.
customersthatstick.com

13. Take Starbucks for Example…
If a customer buys a $5.00
latte, that transaction has
costs associated with it.
The milk, the cup, the
coffee, the lid, and the
flavoring all add to a
variable cost that is
incurred for that latte
transaction.
customersthatstick.com

14. Marginal Profit of a Latte
$5.00 latte
-$0.50 cup
-$0.50 lid
-$0.25 milk
-$0.25 flavoring
$3.50 Marginal Profit

15. Marginal Profit – Step 2
The next step is figuring
out the average of all of
the company’s
transactions.
You want to figure out the
number of each different
type of transaction and
calculate an average profit
profile per customer.
Average

16. Labor might not always be a variable cost.
If your company’s labor is constant and
does not depend on the number of units
sold, labor may not be included in the
calculation.
Note…

17. What is Your
Customer’s
Lifetime?
(Customer
Retention Rate)

18. Retention Rate (RR)
We begin by calculating the
retention rate.
Take the number of
customers from last year who
are still customers this year.
i.e. if you had 100 customers
last year and 45 are still
doing business with you this
year, then your retention rate
is 45%.
Current
Retained
Customers
÷
Customers
from Last
Year

19. Customer Lifetime
Using your retention
rate of 45%...
CL = 1/(1-.45) = 1.8
Your Customer
lifetime is 1.8
years
Customer
Lifetime (CL)
=
1÷(1-RR)

20. The Last Piece
Is Your
Discount Rate…

21. Discount rate is the interest
rate you borrow at in your
business.
The concept is based on the
time value of money, the
premise that a dollar today
is worth more than a dollar
tomorrow.

22. The longer you calculate your customer
lifetime to be, the more important the
discount rate becomes and the more
inaccurate your model becomes when
you ignore the rate.
Just Remember…

23. Now That You
Have the Parts:
Understanding
Customer
Segmentation

24. At the heart of customer segmentation is
the belief that all customers are not
created equal and that understanding
the differences among customer
segments is key to effectively acquiring
and retaining customers.

25. How would I group my customers if I
wanted to customize my
marketing, retention, or product
offerings?
Ask Yourself One Simple Question:

26. Where To Begin?

27. Break down the segments based
on differentiated products or
services.
For example, if your department
provides distinctly different
services to both small businesses
and individuals, you may consider
calculating a Customer Lifetime
Value for each segment.

28. If your business does
not have obvious
divisions, you should
consider what factors
have the most impact
on customer buying
characteristics – or
segment on behavior
itself.

29. customersthatstick.com
Start with your gut…
If you know your business, you probably
have an innate sense of what types of
customers act what way.
Try to fill in the blanks in this statement…

30. Customers who _____
tend to _____.

31. Using CLV
Technically, the calculation of
Customer Lifetime Value should
include acquisition and retention
costs.

32. What Are Your
Customer
Acquisition
Costs?

33. customersthatstick.com
Take your marketing
expenditures for a
period and divide by
the number of new
clients in the same
period.
What Does It Cost to Get a Customer
In the Door?

34. Try to find a period that is relevant for you and
your business based on how you approach your
marketing and make sure to account for the lag
time between marketing and acquisition.

35. What Are Your
Retention
Costs?

36. • Perks for longevity
• Discounts for existing customers
• Freebies for certain buying behaviors
Start with Obvious Hard Costs
PS: Make sure to average the cost out across the
entire customer base.

37. If you send your
sales staff to a
customer service
seminar, is that a
retention cost?
Think About Your Soft Costs
If you redesign the help section on your web
site, is that a retention cost?

38. One question that should help determine if a soft
cost belongs in the retention “bucket” is this:
What is our primary
reason for incurring
these costs?

39. If customer
satisfaction, retentio
n or any similar
customer service-
based sentiment is
the primary reason, it
is probably safe to
consider the
expenditure a
retention cost.

40. If you are segmenting your customer base, you
will need to apply these calculations for each
segment, not the customer base as a whole.
A Final Note on Acquisition and Retention

41. Tying It All Together
Now that you have your CLV and a
grasp on your marketing and
retention costs, it is time to put the
two together.

42. An Example…
Customer Lifetime Value and Acquisition

43. customersthatstick.com
The owners of a golf pro shop determine that
most of their customers come from two zip
codes, one to the east and one to the west. The
owners decide to calculate the CLV separately
for each zip code.
They discover that the CLV for the eastern
customers is 4 times the CLV for the western
customers.

44. They also find that the eastern
zip code is 30% of their
customer base but 80% of their
profit.
The western zip code represents
70% of their customer base and
20% of their profit.

45. The pro shop owners
have been spending their
marketing dollars evenly
between east and west.
Calculating the CLV for
each segment made it
obvious that their
marketing dollars were
not being allocated
effectively.

46. Final Thoughts
Computing Customer Lifetime Value can
be one of the most eye-opening and
rewarding exercises in business.
Knowing your CLV can help you truly
understand the value and effectiveness of
your marketing and retention
expenditures.

47. Customer
Lifetime Value
Calculator and
Resources

48. We hope that you can derive true value from a
back of the napkin approach to CLV, but you
should realize the limitations of using such a
non-scientific approach.
Each business is different, but there might be a
time where you feel the need to get your geek
on. If so, here are
some more resources
dedicated to CLV.

49. customersthatstick.com
1. An infographic on calculating Lifetime Value
from Kissmetrics
2. Modeling Customer Lifetime Value from
Gupta et al (An academic tract on the
subject. PDF link.)
3. Customer Lifetime Value calculator from
Harvard Business Review Publishing
4. Customer Lifetime Value overview from
Wikipedia
(i.e. Getting Your Geek On)

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