How Much Are Your Customers Worth?

Abstract

This chapter discusses the concept of customer lifetime value (CLV) that can help firms align the net present value (NPV) of the monetary contribution of a customer’s future purchase transactions with the cost incurred in serving them, thereby identifying ways to profitably engage with the customer. This chapter also presents CLV as a forward-looking metric, which is a significant improvement over backward-looking metrics such as recency–frequency–monetary value (RFM), past customer value (PCV), share of wallet (SOW), and customer tenure/duration. Accordingly, CLV is defined as “the sum of cumulated future cash flows—discounted using the weighted average cost of capital (WACC)—of a customer over their entire lifetime with the company.” Further, this metric tracks the future purchase behavior of a customer and computes their value in present-day terms. Based on this definition, this chapter identifies the drivers of CLV and classifies them as exchange characteristics and customer characteristics. Following this, managerial strategies to maximize CLV, also known as the Wheel of Fortune Strategies, are advanced and discussed. Additionally, the extensions to CLV (viz. salesperson future value, global CLV, computing CLV for consumer packaged goods) are presented.