This document discusses Customer Lifetime Value (CLTV), detailing its definition, calculation methods, and importance in assessing customer acquisitions and profitability. It provides an example of calculating customer acquisition costs and CLTV over time, including factors such as retention rates and gross margins. The document concludes with considerations for future predictions of CLTV in different market scenarios.

1. Customer Lifetime Value
(CLTV)
2019.05.07
JY (천재윤)

2. What is CLTV?
• Customer Lifetime Value
In marketing, Customer Lifetime Value is a prediction of the
net profit attributed to the entire future relationship with a
customer. (Wikipedia)

3. Customer Acquisition Cost
Acquisition Termination
Customer Acquisition Costs are those funds that are used in
order to introduce new customers to the company’s products
and services in hopes of acquiring the customer’s business.
(Investopedia)
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4. Components of Total
Acquisition Cost
• Example - Fitness Club
Design costs
Marketing costs
Printing costs
Distribution costs
Others

5. Business Case
Customer Acquisition Channel : Flyer
Objectives : Attract new customers to the club
Budget : $2,000
Prospects Flyer List : $20 / 1k (5k purchased)
Flyer Design : $100 (flat-rate)
Marketing Copywriting : $200 (flat-rate)
Printing : $0.05 / copy (5k copies)
Distribution : $0.3 / copy
Response Rate : 5%
Total Customer Acquisition Cost?

6. Business Case
Total Acquisition Cost
= ($20 × 5) + $100 + $200 + ($0.05 × 5,000) + ($0.3 × 5,000)
= $2,150
New Customer Count
= Targeted Customer Count × Response Rate
= 5,000 × 0.05 = 250
Customer Acquisition Cost
= $2,150 / 250 = $8.6

7. Business Case
How much value do the customers generate?
New customer count : 250
Average customer spend : $10
Gross margin : 50% (example)
Total Customer Value
= # of new customers × average customer spend
× gross margin
= 250 × $10 × 0.5 = $1,250
Net Profit
= Total Customer Value - Total Acquisition Cost
= $1,250 - $2,150 = -$900

8. Is CAC Worth It?
Negative net profit…

9. Things to Consider…
Will they purchase again?
How much value will they generate subsequently?
How long will they keep a relationship with the business before
switching or terminating?
Will they ever become a customer if it weren’t for the acquisition
campaign?

10. Components of CLTV
1. Period
2. Retention Rate
3. Average Spend per Customer
4. Gross Margin
5. Retention Cost
6. Discount Rate

11. Calculating CLTV
Method 1
Total CLTV = Sum of CLTV for each period - Acquisition Cost
Period 0
= New Customer Count × Average Customer Spend at Period 0
× Gross Margin
Period 1
= New Customer Count × Retention Rate at Period 1 ×
Average Customer Spend at Period 1 × Gross Margin
Period 2
= Retained Customer Count at Period 1 × Retention rate at Period 2
× Average Customer Spend at Period 2 × Gross Margin
…
Period N
= Retained Customer Count at Period N-1 ×
Retention Rate at Period N ×
Average Customer Spend at Period N ×
Gross Margin

12. Calculating CLTV
Method 1
CLTV for month 0 = 250 × $10 × 0.5 = $1,250
# of retained customers for month 1
= 250 × 0.7 = 175
CLTV for month 1 = 175 × $10 × 0.5 = $875
# of retained customers for month 2
= 175 × 0.7 = 122.5
CLTV for month 2 = 122.5 × $10 × 0.5 = $612.5
…
# of retained customers for month 12
= 4.94 × 0.7 = 3.46
CLTV for month 12 = 3.46 × $10 × 0.5 = $17.30
# of retained customers for month 13
= 3.46 × 0.7 = 2.42
CLTV for month 13 = 2.42 × $10 × 0.5 = $12.11
Total CLTV
= Sum of All Periods - Acquisition Cost
= $4,138.41 - $2,150 = $1,988.41
CTLV per Customer = $1,988.41 / 250 = $7.95 (It worth it!)
New Customer Count : 250
Acquisition Cost : $2,150
Period : Month
Retention Rate : 70%
Average Customer Spend per Period : $10
Gross Margin : 50%

13. Calculating CLTV
Method 2
Total CLTV
= (Number of Customers at Period 0 ×
Average Customer Lifetime ×
Average Spend per Customer per Period ×
Gross Margin) - Acquisition Cost
where Average Customer Lifetime = 1 / (1 - retention rate)

14. Calculating CLTV
Method 2
Average Customer Lifetime
= 1 / (1 - retention rate)
= 1 / 0.3
= 3.33 months
Total CLTV
= (Number of Customers at Period 0 ×
Average Customer Lifetime ×
Average Spend per Customer per period ×
Gross Margin) - Acquisition Cost
= 250 × 3.33 × $10 × 0.5 - $2,150 = $2,012.50
New Customer Count : 250
Acquisition Cost : $2,150
Period : Month
Retention Rate : 70%
Average Customer Spend per Period : $10
Gross Margin : 50%

15. Calculating CLTV
Total CLTV (Method 1)
= $4,138.41 - $2,150 = $1,988.41
Total CLTV (Method 2)
= 250 × 3.33 × $10 × 0.5 - $2,150 = $2,012.50
New Customer Count : 250
Acquisition Cost : $2,150
Period : Month
Retention Rate : 70%
Average Customer Spend per Period : $10
Gross Margin : 50%

16. Return of Marketing
Investment
Month Retained CLTV Cum. CLTV ROMI
0 250.00 1250.00 1250.00 0.58
1 175.00 875.00 2125.00 0.99
2 122.50 612.50 2737.50 1.27
3 85.75 428.75 3166.25 1.47
4 60.03 300.13 3466.38 1.61
5 42.02 210.09 3676.46 1.71
6 29.41 147.06 3823.52 1.78
7 20.59 102.94 3926.47 1.83
8 14.41 72.06 3998.53 1.86
9 10.09 50.44 4048.97 1.88
10 7.06 35.31 4084.28 1.90
11 4.94 24.72 4108.99 1.91
12 3.46 17.30 4126.30 1.92
13 2.42 12.11 4138.41 1.92
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17. Net Present Value &
Discount Rate
Net Present Value (NPV)
NPV is the difference between the present value of cash inflows
and the present value of cash outflows over a period of time.
(Investopedia)
Discount Rate (d)
Discount rate refers to the interest rate used in discounted cash
flow (DCF) analysis to determine the present value of future cash
flows. (Investopedia)

18. Net Present Value &
Discount Rate
Eg.
Ad Spend Period 0 = $5,000
Period 0 = $2,000
Period 1 = $1,800
Period 2 = $1,500
Period 3 = $1,200
Period 4 = $1,000
PV at Period 0 = $2,000
PV at Period 1
= $1,800 / (1.1) = $1,636
PV at Period 2
= $1,500 / (1.1)^2 = $1,240
PV at Period 3
= $1,200 / (1.1)^3 = $902
PV at Period 4
= $1,000 / (1.1)^4 = $683

19. CLTV Formula
Infinite Geometric Series
where CAC = Customer Acquisition Cost,
M = Gross Contribution (GC) - Retention Cost (R),
r = Retention Rate, d = discount rate
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20. Calculating CLTV
using Formula
CLTV = - $2,150 / 250 +
= ($10 × 0.5 - $0) × (1 / 0.3)
= -$8.6 + $5 × 3.33
= $8.05
Total CLTV = CLTV × New Customer Count
= $8.05 × 250
= $2,012.5
New Customer Count : 250
Acquisition Cost : $2,150
Period : Month
Retention Rate : 70%
Average Customer Spend per Period : $10
Gross Margin : 50%
Retention Cost : $0 (per customer)
Discount Rate : 0% (per month)
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21. Calculating CLTV
using Formula
CLTV = - $2,150 / 250 +
= ($10 × 0.5 - $0.2) × (1.01 / 0.31)
= -$8.6 + $4.8 × 3.26
= $7.05
Total CLTV = CLTV × New Customer Count
= $7.05 × 250
= $1,762.5
New Customer Count : 250
Acquisition Cost : $2,150
Period : Month
Retention Rate : 70%
Average Customer Spend per Period : $10
Gross Margin : 50%
Retention Cost : $0.2 (per customer)
Discount Rate : 1% (per month)
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22. What’s next?
1. Contractual vs Non-Contractual Settings
• Customer churn is observed in contractual settings, but not
in non-contractual settings such as retailing (only repeat
purchase rate is observed). It will be very difficult to predict
CLTV.
2. Constant vs Non-Constant Retention Rate
• Longer the customer stays, the higher the retention rate.
3. Constant vs Non-Constant Customer Spend per Period
• Cross-sell
• Up-sell