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Lakshman Krishnamurthi
Professor of Marketing
Kellogg School
Northwestern University
1
CLTV =
1
1
Where:
N is the number of periods over which the CLTV is
calculated
Mt is the margin (or profit)generated by customer in period t
r is the retention rate for the period, r(t-1) is the survival rate
for period t
i is WACC (weighted average cost of capital) for the period
AC is the acquisition cost
2
1
2/3/2017
2 1
1 2 3
= + 2 + 3 + . + - AC
1 1 1 1
0 1 2 3 4 5 6 7 8
This formula assumes that you keep the customer in period 1, have
r% probability of keeping the customer in period 2, r2 in period
3, and so on 3
1
Infinite 1
1
1 2 9
+ 2 + 3 + . + 10 ] - AC
1 1 1 1
1
= M [1 + x + x2 + x3 + ..] - AC
1
2
2/3/2017
3
2/3/2017
CLTV =
Since retention r = 1-churn, churn = 1-r. So, 1-r in the
denominator of the formula is simply the churn for the
period, and [1/(1-r)] is the number of periods the average
customer will be alive
For example, if monthly churn is 4%, the average customer
will be alive for 1/(0.04) = 25 months
Then, the lifetime profit of the average customer is M*25, and
CLTV = M*25 - AC
8
4
2/3/2017
5
2/3/2017
11
1
1
2 3 10
+ 2 + 3 + . + 10 ] - AC
1 1 1 1
= M [1 + x + x2 + x3 + ..] - AC
1
This simplifies to
12
6
2/3/2017
14