Customer Lifetime Value is the net present value of a customer after deducting the expenses from the revenues earned for the said customer.

Some of the questions which CLV answers:


Calculation of CLV:

Present Value = \[E^k_{0} - A^k_{0}\] Future Value = \[\frac{(E^k_{1} - A^k_{1})}{(1 + i_1)^1} + \frac{(E^k_{2} - A^k_{2})}{(1+i_2)^2} + ... + \frac{(E^k_{T} - A^k_{T})}{(1+i_T)^T}\]
CLV = Present Value + Future Value

Et = Revenue from a customer k
At = Expenses for a customer k
t = Time period (t=0,1,2…)
(t=0) = Today
T = Predicted duration of a customers relationship i = Interest rate (if any)

Background on how to calculate CLV with respect to the Insurance Industry

Present value of an insurance customer:

PV = Premiums - Cost of Claims - Activity based costs (if any)



Future value of an insurance customer:

\[FV = \frac{R - Cancel + CS - Claim - (ABC)}{(1 + i)}\]
FV = Future Value
R = Revenues
Cancel = A customers cancellation value
CS = A customers cross selling value
Claim = A customers claim value
ABC = Activity Based Costs (if any)
i = Interest rate (if any)

Determination of the different components for future value of a customer

Key Takeaways:

Whats next : Suggested CLV based actions!

Customer Lifetime Value Management:




Note : Special thanks to a research paper by Monika Seyerle