Mathematical Methodologies for Calculating Customer Lifetime Value

About this paper

Companies calculate customer lifetime value (CLV) for many reasons, including improved target marketing, value-based customer segmentation and strategic investment planning. There are several common approaches to calculating CLV, but no standard way – and little evaluation as to the pros and cons of using one method over another. The most common methods are often inaccurate; and even when the inputs are accurate, the mathematics are typically insufficient to yield valid financial calculations. This paper explores the most common approaches to calculating CLV and evaluates their accuracy. Ultimately, it presents new and improved mathematics for calculating CLV that overcome the weaknesses inherent in most approaches used today.