Lifetime Value Tutorial - Interpreting the Results

Interpreting the Lifetime Value Results

The following results are from the OfficeStar Tutorial data set that loads automatically when you select the Tutorial link in the Enginius Dashboard and run with analysis parameters indicated in Running a Lifetime Value Analysis article. 

Customer base evolution

This table reports the number of customers expected in each segment after each period. These simulations take into account:

• The number of customers at the start.
• Customer acquisitions, if any.
• Customer transitions from segment to segment at each period (i.e., transition matrix).

The 'infinity' period simulates where the database will converge to after 250 time periods.

The chart below shows how customer transition from segment to segment evolves over the period.

Note that the "Lost Customers" segment is not displayed. In most applications, all customers eventually become lost customers, and over sufficient time, all other segments become empty.

Customer base valuation

This table reports the discounted net margins for each period and the final net margins for your entire customer base. The last column of the table outputs the expected CLV of your customers determined by summing the stream of all future gross margins, minus all future marketing and acquisition costs, and taking into account both the discount factor and the likelihood of customers switching from one segment to another.

In particular, the Discounted Net Margins (Cumulated) row provides an answer to the question: "Over the next x periods, how much is my customer base worth?"

Based on which segment customers belong to, they may generate revenues (gross margin) and costs. These figures will be cumulated and increasingly discounted over time. At one point, discounting of future revenues and costs will be so high that they will become irrelevant for today's valuation, hence ensuring that the customer base valuation will converge to a non-infinite value (even if the customer base keeps growing).

Based on predicted customer base evolution and discount rate, the customer base is currently valued at $2,954,398.

The Valuation per period, Cumulated valuation, and Cumulated valuation (after discount factor) charts all show a graphical representation of the above data.

Valuation per period (no discount factor applied)

Cumulated valuation (no discount factor applied)

Cumulated valuation (after discount factor)

• The dashed, grey line corresponds to the 'Net margin (cumulated)' already reported in the previous chart.
• The plain, red line corresponds to the same figure after applying the discount factor.
• The dashed, red line corresponds to the value at which the previous line will converge to after an infinite number of periods. This value corresponds to the customer base valuation in current monetary terms.

Customer lifetime value per segment

Customer lifetime value per segment is obtained by simulating how likely a customer will transition to segments over time if they were to start from one specific segment, and how much revenue they are likely to generate over time in doing so. These revenues are then discounted and cumulated to obtain a single financial figure, corresponding to the customer lifetime value of a single individual in the initial segment.

Note that customer acquisition costs are NOT incorporated in these simulations. If acquisition costs (if any) are below the customer lifetime value (i.e., long-term, cumulated, discounted margin), then acquiring a customer at that cost is profitable.

The following table shows the breakdown of how one customer that starts in the Active customers segment will transition between segments in their lifetime. The analysis output will include a table for each segment.