Customer lifetime value

The customer’s lifetime is the period in which we perform sales transactions, and the calculation of its value is a profit forecast based on the relationships that are mutually achievable. There are several ways to calculate it, and all of them show us profit flow that we can expect by retaining a customer. In other words, how much money comes if they pay regularly, if they are financed, and if a certain percentage of customers goes from year to year.

Customer lifetime value (CLV) is calculated in a very simple way, by completing the following table:

The first row of the table is the time period, expressed in years. In the following case, this is a period of 5 years, from 0 to 4.

The second row represents CLV in normal circumstances, when customers are paying on regular basis. The third line is the same value when we credit customers (deferred payment) and is calculated using the formula:

=PV($B$2,B5,,-B6)

The present value is calculated in relation to the current discount rate that in the $B$2 cell.

If we know the retention rate ($B$3) in fourth row can calculate reduced profit due customers that left us:

=B7*$B$3^B5

If you finally look at the total values, you will see how much we earned if the customers paid regularly, if we financed them and if we financed them and a certain number of customers left us. By analyzing these values it is easy to conclude that it is very important to keep existing customers and work on continuous improvement of relations with them.