Customer lifetime value (CLV) measures the net profit attributed to the individual customer over the course of their entire relationship with a business. Calculating CLV involves analyzing historical customer data and financial transactions to determine a customer's past and predicted future value based on revenues, costs, and expected customer lifetime. Implementing CLV requires aligning stakeholders, protecting sensitive data, integrating CLV metrics into business processes, and training employees on how to utilize CLV insights.

1. A GUIDE BY

2. Businesses have to allocate their
limited resources on a logical basis
using a range of indicators to manage
and understand customers.
For example: impressions, click-throughs,
sales, revenue, conversion rate, cost per
acquisition and retention rate.
These are relatively easy facts to measure in
isolation and great for efficient use of budget,
controlling costs, driving sales and helping to
justify your budgets. The blind-spot, however,
is that they assume all customers are equally
profitable for a given product or service.
This means you could be wasting your
acquisition budget on easy to win, low-profit
customers and missing better opportunities
for value growth, without even knowing it.
Big ticket sales don’t always contribute the
most to profit and can erode your margin,
particularly if they have a high cost of sale,
service or maintenance.
Similarly, you could be wasting your retention
budget on saving low-profit customers and
have nothing left to invest in the ones you
really want to keep.
In reality each customer is an individual and
consumes your products and services in
different ways so, will have different impact
on business revenues, costs and margins.
Measuring profitability at a customer level
creates a common currency that helps your
business understand which customers are
profitable and which are costing you money
across the organisation and through your
external agencies.
© Net Gain Ltd 2017 2

3. © Net Gain Ltd 2017 3
Today, the challenge is scale: Significantly more customers, data, products, channels, staff,
scrutiny and regulation need consideration when understanding and managing customers.
Until the mid-20th century, shop keepers
intuitively managed their customers by
profitability and personalised the tone and
content of interactions.
Personal contact meant they knew most by
name, their circumstance and the environment
they lived in.
Observation of browsing and purchase habits
meant they knew likes and dislikes, how much
spent and when.
This helped them know what other products or
services to offer, when to do it and how best to
go about it.

4. © Net Gain Ltd 2017 4
Customer profitability always changes
because customer behaviour always
changes. The important question is
whether it is increasing or reducing, and
by how much?
Knowing the profitability of each
customer means the business can see
which have higher value and contribute
most to overall profitability, and which
are lower value or eroding margin.
Increasing the value of customers is the
cornerstone of customer relationship
management (CRM), but merely
knowing the value of a customer isn’t
going to magically make more high value
customers appear or enable you to
retain them.
So, what would you do differently
if you knew the profitability of
each customer?
It’s a powerful tool that should be used
to make smarter and more rational
decisions on prioritising resources to
create competitive advantage.
For example, it can be used to set
customer development objectives and
strategies, and inform product and
service propositions and capability
investments.

5. It enables better decisions on how
much to spend on acquiring the right
customers and retaining the best
ones to ensure commensurate
returns on the investment and effort
you put in.
It also encourages better proposition
design that is focused on meeting
customer needs and enhancing
profitability, and helps measure the
effectiveness of customer
engagement strategies, whether
through digital or offline media and
across the entire customer
relationship.
However, measuring and using
profitability at an individual customer
level is sometimes perceived as
something that is too difficult,
complicated, intimidating, or
inaccessible to end-users.
There are many reasons for this, but
these are barriers that can and
should be easily overcome so that
the strategic benefits of knowing
customer level profitability can be
realised.
© Net Gain Ltd 2017 5
It gives credibility to investment
strategies and puts marketing
right at the centre of decision-
making in the organisation, which
has been justifiably missing in
most businesses.

6. We should first define a customer as a
consumer of your products and
services. This may seem obvious, but is
it as clear cut as that in your business?
Do you include non-active or dormant
customers? What about retail and
commercial customers? Is a joint
customer considered 1, 2 or 3 different
relationships?
There can be many different ways to
define a customer, even within the
same organisation.
Some definitions are by design, e.g., it is
sometimes advantageous to report all
unique product holders as customers,
whereas at other times only those that
actively consume are counted.
Other definitions can be a result of
legacy system integration, or caused by
inaccuracies in identifying customers
between transactions, purchasing at
different times, across channels or
across brands.
Having a common definition of what
constitutes a customer ensures the
measure of value can be understood
and applied consistently across the
organisation.
© Net Gain Ltd 2017 6
customer profitability n., a
common currency that measures
the value of the customer to the
organisation based on how much
cash flow they generate over the
duration of their relationship
with your business.

7. Lifetime Value is a forecast of the cash
flows expected over the lifetime of
the customer.
Cash flows normally include revenues, costs
to serve, costs of managing the relationship,
costs of administering the product and the
business’ fixed costs.
This cash flow is adjusted according to the
expected lifetime of the individual customer
and, as a forward-looking future value, is
usually calculated as a discounted net
present value.
The expected lifetime is how long the
customer is likely to continue doing business
with you.
This is sometimes governed by a contract or
the customer’s continued need for your
products and services, or their satisfaction
with your service, or their ability to continue
paying for it.
It’s also dependent on the business’ ability
to continue satisfying those needs and
retain the customer over the course of a
reasonable payback period, e.g. 12 months,
or 5 years.
The length of this payback period will
depend on the type of product or service,
and the organisation’s attitude towards, and
confidence in, long term forecasts.
© Net Gain Ltd 2017 7

8. The actual definition will depend on the
business’ objectives for CLV, the type of
products and services, availability of data,
the business’ attitude to using certain types
of information and the confidence in each.
Some definitions can include a view of
historic, current and forecasted customer
profitability, whereas others might just
include current and forecasted information.
Similarly, the definition of CLV might only
refer to the products and services the
customer has actually purchased, whereas
other definitions might also include the
potential value of all products that the
customer could purchase from you.
There is often a preconception that any low
value customer can be turned into high
value one through cross- and up-selling.
Every customer is different and many may
have no further need for your propositions
or have needs that your business is unable
to satisfy, making it difficult or very costly to
try and increase their value.
In addition to CLV, measuring a customer’s
potential value (PV) provides an estimate of
the additional value that might be realised
from a customer through, e.g., increased
spend on a product, upgrading to a better
product, taking additional services, or
referring friends.
© Net Gain Ltd 2017 8
Customer profitability is often referred to as Customer Lifetime
Value (CLV) or Lifetime Value (LTV), but its definition varies from
business to business.

9. © Net Gain Ltd 2017 9
up-sell
cross-sell
prospect
growth : Prioritising cross- and up-sell
activities, loyalty and reward programmes,
and driving affinity or content deals
acquire
Product bundling strategies, up-selling
recommendations and prioritising manual decisions
conversion
Offers and incentives, pricing strategies,
quotations and prioritising lead follow-ups
targeting
Proposition design, search engine
ranking, best-buy ranking, ad
placement, lead scoring, win-back
strategies and segmentation
serve
Prioritising service, service-
levels and claims handling
churn
Prioritising customer ‘save’
incentives, and debt collection
strategies
retention
Prioritising proactive retention
and reinvestment pricing levels
Purchase / usage
Prioritising promotions, offers and incentives

10. Which customers should we target?
How much to invest in retention?
Where to focus proposition development?
What proportion of budget should be allocated to each media?
What level of risk vs return?
What should we cross-sell to each customer?
Which customers should we reward or delight?
Which engagement strategies are adding or eroding profit?
© Net Gain Ltd 2017 10

11. Probably because it can seem
complicated, inaccessible and
intimidating for marketers and
end-users.
© Net Gain Ltd 2017 11
Defining and calculating CLV typically
involves lots of historic data about
financial transactions, business
profitability and customer profiles and
behaviour.
This is examined using sophisticated
statistical and predictive analysis by
data scientists and financial wizards to
create a formula for calculating the
customer’s value.
A further complication is the formula
could be different for each product and
service.
Some organisations can get obsessed
with trying to create the perfect
definition of customer value or get
stuck trying to agree how best to
allocate the revenues and costs to
individual customers.
For example, how should the
organisation attribute fixed costs that
cannot be directly influenced through
customer profitability?
However, there is typically less debate
about historic profitability than about
future predictions and forecasts.
Luckily, the definition doesn’t need to
be perfect.
The output must merely be
differentiated enough to enable a
comparison between customers so
that rational and smarter trade-off
decisions can be made.

12. As an example, we can use
Customer Lifetime Value and
Potential Value in a simple matrix
(at left) to create a segmentation
showing the CLV, PV and relative
base size.
The most profitable customers
today are in the right column,
whereas those with the most
potential are on the top row.
The differences in the measures
show the scope for investment and
opportunity to guide objective and
strategy setting
This is a simplified example that
could be extended to consider
other factors such as customer
dissatisfaction, churn, arrears,
fraud etc., and whether the
customer is currently subject to any
formal activity programmes, such
as collections or on-boarding.
In addition, there may also be a
noticeable change in a specific
customer’s behaviour or
circumstance that could indicate an
opportunity to add value to the
relationship and trigger an
immediate reaction.
© Net Gain Ltd 2017 12
This ensures the service and treatment of your customers is consistent
and commensurate with their likely profit potential.

13. © Net Gain Ltd 2017 13
It could reveal needs, preferences, behaviours, demographics and attitudes etc., to help personalise
engagement strategies, content, propositions and messages.
E.g. these could be families and couples in lower
income groups that are less digitally savvy, price led
and don’t relate to the brand on an emotional level.
We could design our propositions to make it harder
for them to leave, but easy to stay.

14. For example, we may have the
option to communicate a cross-sell
offer by email; a prompted upgrade
during a service call; a behavioural
trigger that informs the customer by
SMS; personalised newsletter
content; a reinvestment value for
reactive retention; or a prompted
offer when logged in.
Calculating the likely change to the
CLV for each possible
communication option would make
it easier to select the one with the
best outcome.
So, if profitability is our segment
objective then we could calculate
the potential incremental CLV for
each option and compare the results
across all communication options
and select the one with the greatest
incremental profit.
However, if we are taking a more
holistic view of our customer base,
then we could consider whether it’s
better to trade-off a small amount of
profit today to gain additional sales
to customers that may also have
greater potential value tomorrow.
This would mean selecting the
option that has the greatest chance
of success, but with the least trade-
off in potential profitability.
© Net Gain Ltd 2017 14
CLV can also be used to guide individual customer activities.

15. Businesses are used to making top-
down resource allocation and
budgeting decisions. Profitability is
usually reported at a company,
business unit or product level as a
periodic statement of fact about the
past and sometimes a forecast of
revenues and costs.
However, CLV uses historic financial
data and predictions at a customer
level to create a forward looking
value calculated on a frequent basis.
This requires a reconciliation of
accounting and timing differences
between how business profitability is
reported and CLV is calculated.
Embedding CLV into the organisation
is, therefore, likely to represent a
significant transformational change to
the business’s operating model.
Senior sponsorship is essential to
prioritise and align resources to
ensure the benefits are fully realised.
In addition, stakeholders must be
signed up to the implications on
people, processes and propositions.
A question that is commonly asked is
how long until the benefits of CLV are
realised? There is no single answer to
this, but it will depend on availability
of people, data and knowledge,
organisational capabilities and
readiness, stakeholder consensus and
level of resources.
© Net Gain Ltd 2017 15
The advantages of CLV are realised
when the organisation refocuses
its resources and efforts on those
customers that have the greatest
value and potential.

16. © Net Gain Ltd 2017 16
Different areas of the organisation may have
different views on how CLV should be calculated
and applied. All are equally valid, but a common
view must be sought where all stakeholders are
equally convinced of the validity of a single,
consistent definition and how the results will be
used.
CLV developed independently can be met with
resistance from other business areas. They may
caution use of certain data or raise concerns
about how the results impact plans, which can
raise roadblocks, waste effort and hinder
benefits.
Involving these other areas as stakeholders would
help avoid these setbacks and ensure alignment.
Regularly reinforcing the purpose and benefits of
CLV and progress, collaboration and consensus to
stakeholders maintains positive vibes for the
programme.
This is particularly important in the early stages
when tangible or visible output is often scarce. It
also ensures there are no surprises, helps avoid
potential roadblocks, raises awareness and
ensures the business is prepared for when it
becomes available.
Consideration should also be given to ensuring
appropriate levels of communications are used
across the organisation, e.g. the level of
disclosure to stakeholders will be significantly
more open than to a customer-facing team.

17. © Net Gain Ltd 2017 17
Create a dedicated
project team
Delivering CLV needs broad sets of skills, capabilities, deep knowledge and experience. This may already exist within the business, or
need to be developed, acquired or hired, which can create a dilemma of whether to use existing, internal resources and backfill their
roles, or to source external subject matter experts (SME) for the project. Both approaches have pros and cons, with the former
improving business buy-in to the concept, whereas the latter helps achieve best practice. Ideally, have a mix of both.
Adopt an agile
approach
Agile is commonly used on IT projects, but it can be used in CLV developments because its learn-as-you-go approach helps manage
expectations and prioritise activities to deliver benefits quicker. For example, the business could start with a simple definition in, say,
one area, with subsequent ‘releases’ evolving the definition and rolling-out to other areas.
Protect sensitive
commercial data
CLV needs data that is usually considered commercially sensitive and restricted to certain areas of the business, such as finance.
However, other parts of the business may be better skilled to profile and model customer behaviour. Consequently, a project team
comprising specialists from each area would combine relevant domain knowledge and skills, whilst maintaining control of information.
It may also need to be desensitised for operational use by customer-facing teams, e.g. as a segment code.
Operationalise the
CLV calculation
Systematically calculating CLV is often a complex process involving multiple, disparate systems and processes that may not be possible
or, at best, difficult to implement with existing operational capabilities, which may need to be enhanced. However, it is better to have
some understanding of CLV than have none at all so, it is advisable to start with rational assumptions and then refine over time whilst
these deficiencies are addressed.
Integrate the
result into BAU
processes
Business processes such as campaign management and content management need to be enhanced to incorporate the personalised
strategies for customer acquisition, growth and retention strategies. Once these new strategies have been implemented, they should
be tracked, measured and monitored, which means any automated reporting and BI systems need updating to incorporate and report
on CLV changes so that the information can feed back into the process of refining the strategies.
Embedding CLV
into the culture
The end-users of CLV need to be aware of what it represents and what is expected of them so, briefings and training are required to
help them prepare for its use. For example, customer facing staff need to know what CLV and PV reveal, where to find them and how it
should influence what they do. Insight analysts, BI reporting teams and operational marketing teams need to know where to find the
CLV output for use in their analysis.

18. CLV is only as good as the better decisions
that can be made from it and businesses
can waste time and effort trying to create
an all-encompassing, perfect definition of
CLV that ends up never properly being
implemented.
It is better to start with a simple definition
of CLV that can be quickly adopted,
reconciled and properly embedded into the
organisation to prove its benefit before
embarking on a programme to evolve or
refine its definition further.
CLV is not a replacement for all other
measures - they still help you diagnose
what’s going on in a specific area. So, you
might be getting great response rates from
that killer retargeting campaign, but the
question that should be asked is, are the
customers you’re acquiring going to be as
profitable as they need to be?
Overlaying customer-level profitability is a
common currency that makes it significantly
easier to demonstrate how your strategies
directly contribute to business success, and
that’s a good thing, right?
So, what are you waiting for? Time to start
focusing on the customers that really
matter to your business.
© Net Gain Ltd 2017 18
In a word, yes.

19. Net Gain helps B2C companies make sense of and
optimise their customer relationships.
We work with businesses that need that something
extra to help them go faster and achieve more from
their data, insight, tools, processes and teams.
www.NetGainLtd.co.uk
Jeremy Williams is the founding director
of Net Gain Ltd. He’s worked in senior
positions for Santander, Virgin Media
and Experian, and around the world
with 100’s of leading brands as an
agency consultant across financial
services, digital TV, broadband, mobile
and business-to-business.
Jeremy has 25+ years’ real-world experience in Customer
Relationship Management and data strategy.
He has deep understanding of how to accelerate
customer engagement initiatives and harness the unique
mix of people, data, analytics and technology that
organisations already have.
We’re based in the middle of the UK (i.e. not London),
but we do have passports.
Whether you’re just starting out, looking to
improve, or just want to find out more, we’d love
to hear from you and the journey you’re on.
We can help you guide and implement any of the
areas outlined in this document, from inception to
fruition, wherever your business is on its journey.
All images are under CC0 licence.
No statistics were harmed in the making of this document.