Model Overview

Lifetime Value (or Customer Lifetime Value), represents a metric of a customer's value to the organization over the entire span of their relationship.  Short-term sales are a factor, but so are overall customer satisfaction, the churn rate in the segment, and the costs to acquire a new customer and retain an existing customer.

The lifetime value approach helps firms answer such questions as: 

• How much is my customer base "worth"?
• Taking into account observed churn rates, how many currently active customers will still be active in a few years?
• How much is a customer worth, depending on the segment to which he or she belongs?
• If acquiring a new customer costs $150, after how many periods can we recoup this investment?

Lifetime value analysis considers your database at a segment level, using the answers you provide to the following questions:

• How many segments do you have in your database, and how many customers per segment?
• For a given period, how much is a customer worth in each segment (margins and costs)? A "period" within the software is not a specific length of time; it can be any length of time that you choose (e.g., month, quarter, year, etc.).
• What is the likelihood that a customer in segment A will switch to segment B during the next period? This is known as the transition matrix.