How long is the lifetime of a customer?

Too many organisations get no further than trying to answer this impossible question. "The purpose of Life Time Value is quantify the overall value of each customer at either the revenue, gross profit or net profit level." It does not matter that you cannot tell when a customer has lapsed or that customers have irregular buying patterns.

The real relevance of LTV is as an overall measure of the health of your customer database, the more so if you measure LTV regularly and measure the changes in LTV across the main customer segments, ideally using customer segmentation.

Qbase have been buidling and interpreting Life Time Value scores for customers in business to business and business to comsumer marketing and communications for several years.

Our recent project

Our most recent project is for a major internet service provider, for whom we have precisely measured LTV on a historic basis to track the movement in LTV of their customers in different service packages.

As a result of this work we have been able to identify customers who are likely to defect, allowing the ISP to put in place an anti-churn strategy in a complex marketplace.

Qbase can help you audit your data sources to identify the best methodology for creating and then tracking LTV in your customer base - we will work out the best parameters for your market place and the most appropriate LTV formula for you.

In fact there is no definitive method of calculating LTV - there are numerous ways dependent on a number of factors:

• Objective of calculating LTV
• How LTV will be utilised
• Business Type & revenue model
• Available transactional data
• In-house skillsets & tools

Methods

A simple method is to multiply the frequency of orders by the average order value – this would give a basic calculation of actual LTV for each customer.

A slightly more complex method would incorporate cost of sale and variable costs into the equation. Or you could incorporate tenure (or the predicted "life" of a customer and start to get really complex!)

Formula

This formula represents the total value to be gained while the customer is still active. Of course, the challenge lies, in estimating the v(t) and S(t) components in a reasonable way.

(These are the value over time and the churn probability)