A dive into lifetime customer value and how to use it practically in your analytics and business operation

1. Unlocking Value Creation: The Power
of Lifetime Customer Value in
Operational Execution
Created by: Salvatore Tirabassi
Copyright 2024

2. Unlocking Value Creation: The Power of
Lifetime Customer Value in Operational
Execution
You might see it in various places as CLV (Customer Lifetime Value) or LTV (Lifetime
Value). Lifetime Customer Value, or LCV, is what I call this metric. Fairly
interchangeable in my experience, people who use these metrics regularly will know
what you mean when you refer to any one of them. LCV’s compact measurement of the
value of an individual customer unit is powerful. It’s something that I have been
using for years and would like to share some insights into it.
Conceptually, LCV can be calculated as the net value of a customer over their lifetime.
In theory, if you calculate it to a net value including allocated overhead costs for
every single customer and then summed all of those individual values up, you should be
very close or equal to the enterprise value of a business calculated in a discounted
cash flow. These two things (Sum of LCV and DCF EV) equate because the LCV is basically
taking the net present value of each individual customer’s cash flow, and when summed
up, it should equal the net present value of the company’s cash flow. As mentioned, this
assumes you calculate LCV on a net basis with accurate allocation of overheads.
Copyright 2024

3. Unlocking Value Creation: The Power of
Lifetime Customer Value in Operational
Execution
If you look at it from the other direction, you could say that LCV equals EV divided
by all active customers. Cable television companies often use (at least I think they
still do) the EV divided by active customers to derive a value per subscriber metric
for valuation purposes. This is a very easy way to examine the relative strength of
the individual subscribers across companies by comparing the relative value per
subscriber between companies.
The importance of these equalities is that LCV, as an operational metric usable in all
areas of the organization, is tied to value creation for the entire business. If
marketing pushes Customer Acquisition Cost (CAC) down, then LCV goes up, and the
business should gain value. If the cost of goods sold goes up, then LCV goes down, and
so does the value of the business. If an organization embraces this metric, they can
push shareholder value creation alignment into many corners of a company.
Copyright 2024

4. Unlocking Value Creation: The Power of
Lifetime Customer Value in Operational
Execution
When it comes to LCV, one of the main areas of focus in most cases, I find, is CAC.
CAC can be volatile, especially in a world of digital marketing, where competitive
forces can turn against you and make marketing very expensive in short and even
sustained periods of time. As a result, if you have sticky pricing and overall
operating expenses over the course of a year, CAC tends to be the part of LCV that
causes the most fluctuation.
When it comes to marketing, CAC does this in two main ways. The marketing expense can
fluctuate in or out of your favor, which drives LCV up or down. But given that marketing
fluctuations can also translate into higher or lower customer acquisition counts, the
LCV can compound its impact on the overall valuation – the sum of the LCVs as described
above.
The two-by-two below illustrates the concept at a very high level.
Copyright 2024

5. Unlocking Value Creation: The Power of
Lifetime Customer Value in Operational
Execution
Another area of interest is LCV as a contribution calculation before overhead versus LCV
as a net calculation after overhead. The table below shows the differences between the
two calculations at a high level.
Copyright 2024

6. I already touched on the net calculation and how it is connected to EV. The contribution
calculation gives you LCV down to the contribution margin level, which is to say LCV-
Contribution is the lifetime customer value that can be used to pay all overhead and
financing costs of the company. This is particularly useful if the organization has
steady overhead costs that don’t increase quickly with the customer base. It gives the
business operators a sense of how many customers they can add to the business on a
marginal basis profitably. It allows the operators to take aggressive approaches to CAC
and Cost of Goods/Services because every customer with some value at the contribution
level will drive growth in EV. With that said, such an approach would lower net LCV over
time as lower contribution clients would dilute the average LCV.
Unlocking Value Creation: The Power of
Lifetime Customer Value in Operational
Execution
Copyright 2024

7. Unlocking Value Creation: The Power of
Lifetime Customer Value in Operational
Execution
In the fast-paced world of digital marketing, where things can change
quickly, understanding and using LCV gives businesses a reliable way to plan
for the future. The simple matrix and the difference between net and
contribution calculations show how flexible and useful LCV can be. So, as
businesses delve into LCV insights, they can uncover new ways to improve
their strategies, build better relationships with customers, and set the
stage for lasting success.
To sum it up, Lifetime Customer Value (LCV) is a powerful tool that goes
beyond just numbers. It tells us the long-term value of each customer and how
it connects to the overall value of a business. By paying attention to LCV,
companies can make smart decisions that impact everything from marketing
costs to the value of the entire business.
Copyright 2024

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