Customer Life Time Value is discussed in detail with relevant examples.

1. MARKETING ANALYTICS
MARKETING ANALYTICS
BM2507 • Week 11
Introduction and Application
in Marketing
Customer Lifetime
Value (CLV):

2. MARKETING ANALYTICS
“Marketing is the art of attracting
and keeping profitable customers.”
- Kotler & Armstrong, 1996

3. MARKETING ANALYTICS
“Marketing is the art of attracting
and keeping profitable customers.”
- Kotler & Armstrong, 1996
A person, household, or
company whose revenues over
time exceed, by an acceptable
amount, the company costs of
attracting, selling, and
servicing that customer.

4. MARKETING ANALYTICS
Why do we need marketing activities?
Retain
existing
customers
Acquire
potential
customers

5. MARKETING ANALYTICS
Why do we need marketing activities?
Which type of
customers should
be prioritised for
acquisition and
retention?
How much should
we spend for
acquisition and
retention?
Which marketing
mix activities are
effective for
acquisition and
retention?

6. MARKETING ANALYTICS
What do we need to answer these questions?
Customer Lifetime Value (CLV)
If you know how much is a customer’s worth over a lifetime, then you can
answer the question above
CLV = Customer Lifetime Value

7. MARKETING ANALYTICS
Expected
Revenue
by
Year
Year 1 Year 2 Year 3 Year 4 Year 5
$100
$110 $110 $110 $110
Know how much the customers are going to buy over a lifetime
Customer Lifetime Value (CLV)

8. MARKETING ANALYTICS
Customer Lifetime Value (CLV)
t0 t1 t2 t3 t4 t5
𝑅𝑒𝑣1 𝑅𝑒𝑣2 𝑅𝑒𝑣3 𝑅𝑒𝑣4 𝑅𝑒𝑣5

9. MARKETING ANALYTICS
Customer Lifetime Value (CLV)
t0 t1 t2 t3 t4 t5
𝑅𝑒𝑣1 𝑅𝑒𝑣2 𝑅𝑒𝑣3 𝑅𝑒𝑣4 𝑅𝑒𝑣5
𝐶𝑜𝑠𝑡1 𝐶𝑜𝑠𝑡2 𝐶𝑜𝑠𝑡3 𝐶𝑜𝑠𝑡4 𝐶𝑜𝑠𝑡5

10. MARKETING ANALYTICS
Customer Lifetime Value (CLV)
t0 t1 t2 t3 t4 t5
𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 1 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 2 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 3 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 4 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 5

11. MARKETING ANALYTICS
Customer Lifetime Value (CLV)
t0 t1 t2 t3 t4 t5
𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 1 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 2 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 3 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 4 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 5
𝑝1 𝑝2 𝑝3 𝑝4 𝑝5
Annual retention probability

12. MARKETING ANALYTICS
Customer Lifetime Value (CLV)
t0 t1 t2 t3 t4 t5
𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 1 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 2 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 3 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 4 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 5
𝑝1 𝑝2 𝑝3 𝑝4 𝑝5
𝜋1 𝜋2 𝜋3 𝜋4 𝜋5
Annual retention probability
Cumulative retention probability

13. MARKETING ANALYTICS
Customer Lifetime Value (CLV)
t0 t1 t2 t3 t4 t5
𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 1 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 2 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 3 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 4 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 5
𝑝1 𝑝2 𝑝3 𝑝4 𝑝5
𝜋1 𝜋2 𝜋3 𝜋4 𝜋5
= 𝑝1 = 𝑝1. 𝑝2 = 𝑝1. 𝑝2. 𝑝3 = 𝑝1. 𝑝2. 𝑝3. 𝑝4 = 𝑝1. 𝑝2. 𝑝3. 𝑝4. 𝑝5
Annual retention probability
Cumulative retention probability

14. MARKETING ANALYTICS
Customer Lifetime Value (CLV)
t0 t1 t2 t3 t4 t5
𝜋1. 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 1 𝜋2. 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 2 𝜋3. 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 3 𝜋4. 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 4 𝜋5. 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 5
Expected net contribution of each period

15. MARKETING ANALYTICS
Customer Lifetime Value (CLV)
t0 t1 t2 t3 t4 t5
𝜋1. 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 1 𝜋2. 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 2 𝜋3. 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 3 𝜋4. 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 4 𝜋5. 𝑅𝑒𝑣 − 𝐶𝑜𝑠𝑡 5
Discounted present value of expected future net contributions

16. MARKETING ANALYTICS
Present Value, Interest Rate, and Discount Factor
How much is $100 worth next year?
If interest rate is 10%,
𝐹𝑉 = $100 ∙ (1 + 10%) = $110
Future Value
Therefore, the present value (PV)
of $110 next year is $100.

17. MARKETING ANALYTICS
Formula:
𝑃𝑉 =
𝐹𝑉
1 + 𝑖%
= 𝐹𝑉 ∙ 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 1
Present Value, Interest Rate, and Discount Factor
How much is $100 worth next year?
If interest rate is 10%,
𝐹𝑉 = $100 ∙ (1 + 10%) = $110

18. MARKETING ANALYTICS
Formula:
𝑃𝑉 =
𝐹𝑉
1 + 𝑖%
= 𝐹𝑉 ∙ 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 1
Present Value, Interest Rate, and Discount Factor
How much is $100 worth next year?
If interest rate is 10%,
𝐹𝑉 = $100 ∙ (1 + 10%) = $110
Interest rate

19. MARKETING ANALYTICS
Formula:
𝑃𝑉 =
𝐹𝑉
1 + 𝑖%
= 𝐹𝑉 ∙ 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 1
Present Value, Interest Rate, and Discount Factor
How much is $100 worth next year?
If interest rate is 10%,
𝐹𝑉 = $100 ∙ (1 + 10%) = $110
Interest rate 1
1 + 𝑖%

20. MARKETING ANALYTICS
Formula:
𝑃𝑉 =
𝐹𝑉
1 + 𝑖%
= 𝐹𝑉 ∙ 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 1
Present Value, Interest Rate, and Discount Factor
How much is $100 worth next year?
If interest rate is 10%,
𝐹𝑉 = $100 ∙ (1 + 10%) = $110
Interest rate 1
1 + 𝑖%

21. MARKETING ANALYTICS
Present Value, Interest Rate, and Discount Factor
How much is $100 worth after 2 years?
If interest rate is 10%,
Therefore, the present value (PV)
$121 after 2 years is $100.
Future Value 𝐹𝑉 = $100 ∙ (1 + 10%) ∙ (1 + 10%)
= $100 ∙ 1 + 10% 2
= $121

22. MARKETING ANALYTICS
Formula:
Present Value, Interest Rate, and Discount Factor
How much is $100 worth after 2 years?
If interest rate is 10%,
𝑃𝑉 =
𝐹𝑉
(1 + 𝑖%)2
= 𝐹𝑉 ∙ 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 2
𝐹𝑉 = $100 ∙ (1 + 10%) ∙ (1 + 10%) = $100 ∙ 1 + 10% 2 = $121

23. MARKETING ANALYTICS
Formula:
Present Value, Interest Rate, and Discount Factor
How much is $100 worth after 2 years?
If interest rate is 10%,
𝑃𝑉 =
𝐹𝑉
(1 + 𝑖%)2
= 𝐹𝑉 ∙ 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 2
𝐹𝑉 = $100 ∙ (1 + 10%) ∙ (1 + 10%) = $100 ∙ 1 + 10% 2 = $121
Interest rate

24. MARKETING ANALYTICS
Formula:
Present Value, Interest Rate, and Discount Factor
How much is $100 worth after 2 years?
If interest rate is 10%,
𝑃𝑉 =
𝐹𝑉
(1 + 𝑖%)2
= 𝐹𝑉 ∙ 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 2
𝐹𝑉 = $100 ∙ (1 + 10%) ∙ (1 + 10%) = $100 ∙ 1 + 10% 2 = $121
Interest rate
1
(1 + 𝑖%)2

25. MARKETING ANALYTICS
Formula:
Present Value, Interest Rate, and Discount Factor
How much is $100 worth after 2 years?
If interest rate is 10%,
𝑃𝑉 =
𝐹𝑉
(1 + 𝑖%)2
= 𝐹𝑉 ∙ 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 2
𝐹𝑉 = $100 ∙ (1 + 10%) ∙ (1 + 10%) = $100 ∙ 1 + 10% 2 = $121
Interest rate
1
(1 + 𝑖%)2

26. MARKETING ANALYTICS
Present Value, Interest Rate, and Discount Factor
How much is $100 worth after t years?
If interest rate is 10%,
𝐹𝑉 = $100 ∙ 1 + 10% 𝑡
Future Value

27. MARKETING ANALYTICS
Present Value, Interest Rate, and Discount Factor
How much is $100 worth after t years?
If interest rate is 10%,
𝐹𝑉 = $100 ∙ 1 + 10% 𝑡
Formula:
𝑃𝑉 =
𝐹𝑉
(1 + 𝑖%)𝑡
= 𝐹𝑉 ∙ 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 𝑡

28. MARKETING ANALYTICS
Present Value, Interest Rate, and Discount Factor
How much is $100 worth after t years?
If interest rate is 10%,
𝐹𝑉 = $100 ∙ 1 + 10% 𝑡
Formula:
𝑃𝑉 =
𝐹𝑉
(1 + 𝑖%)𝑡
= 𝐹𝑉 ∙ 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 𝑡
Interest rate

29. MARKETING ANALYTICS
Present Value, Interest Rate, and Discount Factor
How much is $100 worth after t years?
If interest rate is 10%,
𝐹𝑉 = $100 ∙ 1 + 10% 𝑡
Formula:
𝑃𝑉 =
𝐹𝑉
(1 + 𝑖%)𝑡
= 𝐹𝑉 ∙ 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 𝑡
Interest rate
1
(1 + 𝑖%)t

30. MARKETING ANALYTICS
Present Value, Interest Rate, and Discount Factor
How much is $100 worth after t years?
If interest rate is 10%,
𝐹𝑉 = $100 ∙ 1 + 10% 𝑡
Formula:
𝑃𝑉 =
𝐹𝑉
(1 + 𝑖%)𝑡
= 𝐹𝑉 ∙ 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑦𝑒𝑎𝑟 𝑡
Interest rate
1
(1 + 𝑖%)t

31. MARKETING ANALYTICS
Acquisition
Cost
Information Needed for Calculating CLV
Interest Rate
Duration Revenue per
Year
Servicing
Costs per
Year
Retention
Rate

32. MARKETING ANALYTICS
Timeline
t0 t1 t2 t3 t4 t5
Acquisition cost -10,000
Projected revenue 3,000 3,500 3,700 4,200 4,500
Projected cost of servicing -1,000 -1,100 -1,200 -1,300 -1,400
Projected net contribution 2,000 2,400 2,500 2,900 3,100
Retention rate
Cumulative retention
Expected net contribution
Interest rate
Discount factor
Discounted preset value
Sum of discounted PV
CLV
Estimating CLV
How do you estimate CLV?

33. MARKETING ANALYTICS
Estimating Retention Rates
How do you estimate retention rates?
Estimating retention rates Year 1 Year 2 Year 3 Year 4 Year 5
Number of users 100 110 120 125 128
Remaining Year 1 users 100% 50 30 20 14
Retention rate 100% 50% 60% 66.67% 70%

34. MARKETING ANALYTICS
Estimating CLV
How do you estimate CLV?
Timeline
t0 t1 t2 t3 t4 t5
Acquisition cost -10,000
Projected revenue 3,000 3,500 3,700 4,200 4,500
Projected cost of servicing -1,000 -1,100 -1,200 -1,300 -1,400
Projected net contribution 2,000 2,400 2,500 2,900 3,100
Retention rate 100% 50% 60% 66.67% 70%
Cumulative retention
Expected net contribution
Interest rate
Discount factor
Discounted preset value
Sum of discounted PV
CLV

35. MARKETING ANALYTICS
Estimating CLV
How do you estimate CLV?
Timeline
t0 t1 t2 t3 t4 t5
Acquisition cost -10,000
Projected revenue 3,000 3,500 3,700 4,200 4,500
Projected cost of servicing -1,000 -1,100 -1,200 -1,300 -1,400
Projected net contribution 2,000 2,400 2,500 2,900 3,100
Retention rate 100% 50% 60% 66.67% 70%
Cumulative retention 100% 50% 30% 20% 14%
Expected net contribution
Interest rate
Discount factor
Discounted preset value
Sum of discounted PV
CLV

36. MARKETING ANALYTICS
How do you estimate CLV?
Estimating CLV
Timeline
t0 t1 t2 t3 t4 t5
Acquisition cost -10,000
Projected revenue 3,000 3,500 3,700 4,200 4,500
Projected cost of servicing -1,000 -1,100 -1,200 -1,300 -1,400
Projected net contribution 2,000 2,400 2,500 2,900 3,100
Retention rate 100% 50% 60% 66.67% 70%
Cumulative retention 100% 50% 30% 20% 14%
Expected net contribution
Interest rate
Discount factor
Discounted preset value
Sum of discounted PV
CLV

37. MARKETING ANALYTICS
How do you estimate CLV?
Estimating CLV
Timeline
t0 t1 t2 t3 t4 t5
Acquisition cost -10,000
Projected revenue 3,000 3,500 3,700 4,200 4,500
Projected cost of servicing -1,000 -1,100 -1,200 -1,300 -1,400
Projected net contribution 2,000 2,400 2,500 2,900 3,100
Retention rate 100% 50% 60% 66.67% 70%
Cumulative retention 100% 50% 30% 20% 14%
Expected net contribution
Interest rate
Discount factor
Discounted preset value
Sum of discounted PV
CLV

38. MARKETING ANALYTICS
How do you estimate CLV?
Estimating CLV
Timeline
t0 t1 t2 t3 t4 t5
Acquisition cost -10,000
Projected revenue 3,000 3,500 3,700 4,200 4,500
Projected cost of servicing -1,000 -1,100 -1,200 -1,300 -1,400
Projected net contribution 2,000 2,400 2,500 2,900 3,100
Retention rate 100% 50% 60% 66.67% 70%
Cumulative retention 100% 50% 30% 20% 14%
Expected net contribution
Interest rate
Discount factor
Discounted preset value
Sum of discounted PV
CLV

39. MARKETING ANALYTICS
Estimating CLV
How do you estimate CLV?
Timeline
t0 t1 t2 t3 t4 t5
Acquisition cost -10,000
Projected revenue 3,000 3,500 3,700 4,200 4,500
Projected cost of servicing -1,000 -1,100 -1,200 -1,300 -1,400
Projected net contribution 2,000 2,400 2,500 2,900 3,100
Retention rate 100% 50% 60% 66.67% 70%
Cumulative retention 100% 50% 30% 20% 14%
Expected net contribution 2,000 1,200 750 580 434
Interest rate
Discount factor
Discounted preset value
Sum of discounted PV
CLV

40. MARKETING ANALYTICS
Estimating CLV
How do you estimate CLV?
Timeline
t0 t1 t2 t3 t4 t5
Acquisition cost -10,000
Projected revenue 3,000 3,500 3,700 4,200 4,500
Projected cost of servicing -1,000 -1,100 -1,200 -1,300 -1,400
Projected net contribution 2,000 2,400 2,500 2,900 3,100
Retention rate 100% 50% 60% 66.67% 70%
Cumulative retention 100% 50% 30% 20% 14%
Expected net contribution 2,000 1,200 750 580 434
Interest rate 10% 10% 10% 10% 10%
Discount factor
Discounted preset value
Sum of discounted PV
CLV

41. MARKETING ANALYTICS
Estimating CLV
How do you estimate CLV?
Timeline
t0 t1 t2 t3 t4 t5
Acquisition cost -10,000
Projected revenue 3,000 3,500 3,700 4,200 4,500
Projected cost of servicing -1,000 -1,100 -1,200 -1,300 -1,400
Projected net contribution 2,000 2,400 2,500 2,900 3,100
Retention rate 100% 50% 60% 66.67% 70%
Cumulative retention 100% 50% 30% 20% 14%
Expected net contribution 2,000 1,200 750 580 434
Interest rate 10% 10% 10% 10% 10%
Discount factor 0.909 0.826 0.751 0.683 0.621
Discounted preset value 1818 992 563 396 269
Sum of discounted PV
CLV

42. MARKETING ANALYTICS
Estimating CLV
How do you estimate CLV?
Timeline
t0 t1 t2 t3 t4 t5
Acquisition cost -10,000
Projected revenue 3,000 3,500 3,700 4,200 4,500
Projected cost of servicing -1,000 -1,100 -1,200 -1,300 -1,400
Projected net contribution 2,000 2,400 2,500 2,900 3,100
Retention rate 100% 50% 60% 66.67% 70%
Cumulative retention 100% 50% 30% 20% 14%
Expected net contribution 2,000 1,200 750 580 434
Interest rate 10% 10% 10% 10% 10%
Discount factor 0.909 0.826 0.751 0.683 0.621
Discounted preset value 1818 992 563 396 269
Sum of discounted PV 4,039
CLV

43. MARKETING ANALYTICS
Estimating CLV
How do you estimate CLV?
Timeline
t0 t1 t2 t3 t4 t5
Acquisition cost -10,000
Projected revenue 3,000 3,500 3,700 4,200 4,500
Projected cost of servicing -1,000 -1,100 -1,200 -1,300 -1,400
Projected net contribution 2,000 2,400 2,500 2,900 3,100
Retention rate 100% 50% 60% 66.67% 70%
Cumulative retention 100% 50% 30% 20% 14%
Expected net contribution 2,000 1,200 750 580 434
Interest rate 10% 10% 10% 10% 10%
Discount factor 0.909 0.826 0.751 0.683 0.621
Discounted preset value 1818 992 563 396 269
Sum of discounted PV 4,039
CLV -5,961

44. MARKETING ANALYTICS
General Formula
General Formula:
𝐶𝐿𝑉0 =
𝑅𝑒𝑣1 − 𝐶𝑜𝑠𝑡1
1 + 𝑖 1
+
𝑅𝑒𝑣2 − 𝐶𝑜𝑠𝑡2
1 + 𝑖 2
r1 + ⋯ + lim
𝑡→∞
𝑅𝑒𝑣𝑡 − 𝐶𝑜𝑠𝑡𝑡
1 + 𝑖 𝑡
r1. r2 … r𝑡-1 − 𝐴𝐶

45. MARKETING ANALYTICS
General Formula
General Formula:
𝐶𝐿𝑉0 =
𝑹𝒆𝒗𝟏 − 𝑪𝒐𝒔𝒕𝟏
𝟏 + 𝒊 𝟏
+
𝑅𝑒𝑣2 − 𝐶𝑜𝑠𝑡2
1 + 𝑖 2
r1 + ⋯ + lim
𝑡→∞
𝑅𝑒𝑣𝑡 − 𝐶𝑜𝑠𝑡𝑡
1 + 𝑖 𝑡
r1. r2 … r𝑡-1 − 𝐴𝐶

46. MARKETING ANALYTICS
General Formula
General Formula:
𝐶𝐿𝑉0 =
𝑅𝑒𝑣1 − 𝐶𝑜𝑠𝑡1
1 + 𝑖 1
+
𝑹𝒆𝒗𝟐 − 𝑪𝒐𝒔𝒕𝟐
𝟏 + 𝒊 𝟐
r𝟏 + ⋯ + lim
𝑡→∞
𝑅𝑒𝑣𝑡 − 𝐶𝑜𝑠𝑡𝑡
1 + 𝑖 𝑡
r1. r2 … r𝑡-1 − 𝐴𝐶

47. MARKETING ANALYTICS
General Formula
General Formula:
𝐶𝐿𝑉0 =
𝑅𝑒𝑣1 − 𝐶𝑜𝑠𝑡1
1 + 𝑖 1
+
𝑅𝑒𝑣2 − 𝐶𝑜𝑠𝑡2
1 + 𝑖 2
r1 + ⋯ + lim
𝑡→∞
𝑅𝑒𝑣𝑡 − 𝐶𝑜𝑠𝑡𝑡
1 + 𝑖 𝑡
r1. r2 … r𝑡-1 − 𝐴𝐶

48. MARKETING ANALYTICS
Infinite Horizon
Infinite horizon is
generally not feasible.
Typically, 3-5 years
horizon is used.

49. MARKETING ANALYTICS
Infinite Period Formula with Constant r and i
𝐶𝐿𝑉 = 𝑃𝑟𝑜𝑗𝑒𝑐𝑡𝑒𝑑 𝑛𝑒𝑡 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
1
1 + 𝑖 − 𝑟
− 𝐴𝐶

50. MARKETING ANALYTICS
Compare the results with infinite period
formula and finite period formula
• Exercise:
• $ 1 constant gross margin, assume 0 acquisition cost
• Step 1: For, 𝑟 = 20%, 30%, 40%, 70%, 80%, 90% calculate the 5 year CLV using the formula
=
1.
1
1 + 𝑖
+ 1.
𝑟
1 + 𝑖 2
+ 1.
𝑟2
1 + 𝑖 3
+ 1.
𝑟3
1 + 𝑖 4
+ 1.
𝑟4
1 + 𝑖 5
• Step 2: For, 𝑟 = 20%, 30%, 40%, 70%, 80%, 90% , calculate infinite horizon CLV using the
formula =
1
1 + 𝑖 − 𝑟
• Calculate the above for various for 𝑖 = 2%, 5%, 10%, 𝑎𝑛𝑑 15%
• Calculate the ratio of the values calculated in both steps (for the same r and i)

51. MARKETING ANALYTICS
Example
Singtel charges $64.90 for MIO Stadium sports
channel. The annual churn rate is 20%. The prime
rate in Singapore is 1.5%. The cost of servicing is
$24.90 per household.
How much will the CLV change by if the churn
rate decreases to 18% or increases to 22%?

52. MARKETING ANALYTICS
Migration model
How we can apply CLV?
So far, the context that we considered is more appropriate for
contractual cases (e.g. subscription to telco services, social media
services, and membership).
This is known as ‘lost-for-good’ cases (once you lose the subscribers,
they are practically gone for good, and a reacquisition effort is
therefore required to get them back.).
The non-contractual cases are known as ‘always-a-share’ situations.
In this case, the customer may not buy in every period.
How can we apply CLV in such contexts?

53. MARKETING ANALYTICS
Example – Cruise Ship Passenger Valuation
p = 6,094
t = 6,198
p = 548
t = 586
p = 152
t = 182
p = 52
t = 78
no = 34
p = 18
t = 18
no = 100
no = 64
p = 36
t = 42
no = 396
p = 76
t = 112
no = 62
p = 14
t = 14
no = 320
p = 18
t = 24
no = 302
no = 5,546
p = 512
t = 556
p = 134
t = 146
p = 16
t = 16
no = 118
no = 378
no = 342
p = 36
t = 38
no = 5,034
p = 336
t = 378
no = 292
p = 44
t = 46
no = 4,698
p = 216
t = 226
no = 4,482

54. MARKETING ANALYTICS
Berger, Weinberg, Hannah – Cohort-Based Estimate
B
A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
C D E F G
(1)
Year
1993
1994
1995
1996
1997
(2)
Number of cruises*
6,198
586
738
714
424
(3)
Average price US$
3,899
4,367
4,891
5,478
6,135
(4)
3,314
3,712
4,157
4,656
5,215
(5)
Present value (PV) of (4)
3,314
3,228
3,143
3,061
2,982
(6) = (5) x (2)
Total present value (PV)
20,540,172
1,891,608
2,319,534
2,185,554
1,264,368
Total: 28,201,236
* From Figure 1
** (3) multiplied by 0.85
Table 1
Net contribution US$**