Study Notes: Customer Lifetime Value (CLV)

 Study Notes: Customer Lifetime Value (CLV)

1. Introduction to CLV

Customer Lifetime Value (CLV) is a prediction of the net profit attributed to the entire future relationship with a customer. It is a core metric in Customer Relationship Management (CRM), helping businesses evaluate the long-term impact of customer acquisition, retention, and referral strategies (Buttle & Maklan, 2019).

  • Focus: Relationship value, not just individual transactions

  • Importance: Assesses the cost-effectiveness of retention vs. acquisition

  • Strategic Use: Drives segmentation, personalisation, and budgeting decisions

2. When Is CLV Easy to Calculate?

CLV is easier to calculate in industries with predictable customer behaviours:

  • Easier Sectors: Banking, telecoms, credit cards, insurance (recurring and stable revenue)

  • Harder Sectors: Fashion, groceries, travel (irregular or seasonal purchases)

3. CLV Influencing Factors

Key variables influencing CLV include:

  • Customer retention rate (lifespan)

  • Revenue per customer

  • Referral value

  • Cost of servicing customers

  • Discount rate to reflect inflation/capital cost

4. CLV Formula (Present Value Basis)

Customer Lifetime Value = Present value of all net margins earned from a customer over time
(Buttle & Maklan, 2019)

Discounting to present value accounts for the time value of money:


Where:

  • r = discount rate (e.g. 5%)

  • X = year of income

5. CLV Cohort-Based Example: Sports Club

Year Remaining Customers Membership Income Additional Sales Admin Cost Retention & Acquisition Cost Net Income NPV (5%)
1 1.00 £520 £100 £30 £300 £260 £260.00
2 0.85 £442 £90 £30 £40 £462 £410.48
3 0.72 £374 £70 £30 £40 £374 £321.94
4 0.61 £320 £50 £30 £40 £300 £247.10
5 0.52 £270 £30 £30 £40 £230 £201.09

  • Total CLV (NPV 5 Years): £1,441

  • Average Annual Return per Customer: £288

6. Assumptions and Considerations

  • Constant annual membership fee: £520

  • Admin and retention costs fixed

  • No price inflation assumed

  • Retention rate: 85%

  • Income includes both direct (fees) and indirect (sales)

7. Preview: Impact of Lower Retention

A recalculation with a 60% retention rate shows a much lower CLV:

Year Remaining Customers Net Income NPV (5%)
1 1.00 £260 £260.00
2 0.60 £357 £323.81
3 0.36 £293 £252.65
4 0.22 £237 £195.00
5 0.13 £188 £164.89

  • Total CLV (NPV 5 Years): £1,196.35

  • CLV Decrease: £244.65 (–17%) due to 25% drop in retention

8. Customer Referrals and Product Characteristics

According to Buttle and Maklan (2019), customer referrals are a critical factor in customer acquisition and retention. CLV calculations can be significantly impacted by the referral value added by existing satisfied customers. Customers often seek referrals in situations involving:

a. High Cost or Financial Commitment

  • Examples: Travel packages, electronics, vehicles

  • Reason: Greater financial risk → reliance on trusted advice

b. Personal or Emotional Impact

  • Examples: Healthcare, education, life insurance

  • Reason: High involvement → more likely to trust word-of-mouth

c. Hard-to-Evaluate Services

  • Examples: Hotels, salons, service providers

  • Reason: Quality is intangible → peer recommendations are trusted

d. Complex or Technical Products

  • Examples: Software, digital tools, fintech

  • Reason: Users rely on social proof to make sense of complicated offerings

e. Crowded Markets with Low Differentiation

  • Examples: Food delivery apps, cosmetics, clothing

  • Reason: Reviews provide a shortcut to navigate choices

"Customers become advocates when they are satisfied and loyal, and when they believe their recommendations will help others" (Buttle & Maklan, 2019, p. 39).

9. Strategic Insights for Marketers

  • Referrals increase CLV by reducing acquisition costs and bringing in high-value customers

  • Retention marketing should be prioritised, as it stabilises revenue and boosts referrals

  • Segmentation based on referral value can improve ROI on marketing spend

10. Conclusion

This lecture and the associated reading demonstrate the strategic value of CLV as a central CRM metric. As supported by Buttle and Maklan (2019), retention and referral activities aren't just soft marketing goals—they are financially measurable imperatives. Companies that invest in long-term customer relationships and advocacy stand to increase profitability significantly.


Reference

Buttle, F. and Maklan, S. (2019) Customer Relationship Management: Concepts and Technologies. 4th edn. London: Routledge.


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