Customer Lifetime Value

Overview

Considering the value of a customer and its relationship to the value of the firm.

Presented by:
Larry Vincent,
Professor of the Practice of Marketing

Presented to:
GSBA 509
September 16, 2026

CLV

The total net profit a company expects to generate from a customer over the entire relationship, calculated by projecting future purchases and costs while accounting for factors like purchase frequency, retention probability, and the time value of money.

A neglected metric

CLV Trend

A third of CMOs in the 2023 study are always or frequently tracking CLV (vs. 25% in 2021)

CRM

Customer Centricity

flowchart TD
  cust_cent["**Customer<br/>Centricity**"]
  understand["**Understanding<br/>the Customer**"]
  culture["**Fostering Customer<br/>Centric Culture**"]
  serve["**Serving<br/>the Customer**"]
  km[Customer<br/>Intelligence]:::desc
  ls[Internal Competencies<br/>& Values]:::desc
  sv[Product & Service<br/>Portfolio]:::desc

  cust_cent --> understand
  cust_cent --> culture
  cust_cent --> serve
  
  understand --> km
  culture --> ls
  serve --> sv
  
  classDef default font-size:15pt;
  classDef desc stroke:#fff,fill:#fff,font-size:14pt;

Forget average customers

The whale curve

What would be the most optimal segmentation for Starbucks?

Who’s best?

Betty

• 2024 Sales: $2,264
• Visits every day
• Dines in for ~1 hour
• Drip coffee & pastry
• Gives staff birthday cards

Don

• 2024 Sales: $1,679
• Visits 3-4x / week
• Usually w/someone
• Very specific latte order
• Successful real estate agent

Joan

• 2024 Sales: $826
• Visits 1-2x / week
• Mostly mobile grab & go
• Orders seasonal beverages
• Follows and posts pics

CLV’s parts

Required components

• Customer profit (Contribution)
• Retention rate
• Cost of capital (Discount factor)
• Customer acquisition cost (CAC)

Thinking in cohorts

Year 1

 

Thinking in cohorts

Year 1

Year 2

 

Thinking in cohorts

Year 1

Year 2

Year 3

Retention and churn

Retention mechanics

Calculating lifetime

How long should we expect to keep a customer in a cohort that averages an 80% monthly retention rate?

Calculating lifetime

How long should we expect to keep a customer in a cohort that averages an 80% monthly retention rate?

How much is this customer worth?

A company has a customer that generates $100 contribution each month. The monthly churn rate is 20%. What is the CLV of this customer?

 

How much is this customer worth?

A company has a customer that generates $100 contribution each month. The monthly churn rate is 20%. What is the CLV of this customer?

Hands-on

A simpler solution

CLV simplified

Required assumptions

• Constant contribution average
• Constant retention rate
• Constant discount rate
• Value estimated over infinite time horizon

Simplification

Approaches

Base method

\[ \text{CLV} = m * \left(\frac{r}{1 + i - r}\right) \]

\[ m = \text{Contribution}\\ r = \text{Retention Rate}\\ i = \text{Discount Rate} \]

Alternate method

\[ \text{CLV} = m * \left(\frac{1 + i}{1 + i - r}\right) \]

\[ m = \text{Contribution}\\ r = \text{Retention Rate}\\ i = \text{Discount Rate} \]

Hands-on

When to use

Exclude present period
of contribution

Include all periods
of contribution

Acquisition costs

• Acquisition costs should only be deducted for new customers acquired in the forecast period
• Don’t deduct legacy acquisition costs for existing customers
• Ratios of LTV to CAC are used widely to manage costs and evaluate acquisition investments

Ratios

Delta analysis

Hands-on

Delta analysis

Key takeaways

Theory

• Estimates the total contribution of a customer throughout their lifetime of business with the firm
• Sensitive to fluctuations in period-over-period contribution and churn rates
• Expressed in present value of all future cash flows

Practice

• Simplified CLV model is good for quick decisions, but has limitations when there is significant variance in core components
• Delta analysis and LTV/CAC ratios are a good guide for investments
• Estimates have a shelf life; CLV is not static. It can be influenced by managerial decisions.