So many Lifetime Values, so little clarities

This week I was doing some research on how to calculate a customer’s Lifetime Value (aka LTV, CLTV, CLV, CV, BBQ, LOL, TLA…)

It seems that no one agrees on even a definition of what Lifetime Value is, let alone how to calculate it.

For some people it’s the sum of the amounts a customer has spent.

Others it’s the sum of the profit.

Others it’s the average order value multiplied by the actual number of orders for a customer.

Others reverse that and it’s the actual order amounts multiplied by the average number of orders.

Or even the net present value of the customer’s future purchases which brings in the Finance Department.

Clear as mud right?

That caused me to read through one of my favorite books on customer data analysis to see what was said in there (Drilling Down by Jim Novo). A whole lot of stuff was said, much of it ranting on how commerce holds Lifetime Value in too much esteem. But one part was fitting:

Here’s a final thought on calculating LTV [Lifetime Value] – there is not one right way to do it across all businesses. The most important issue about LTV is everybody agreeing to the way it is calculated, and everybody knowing what goes into LTV and what does not. LTV is an extremely critical concept to all Data-Driven businesses, because it drives much of the internal decision-making. Hash it out and agree to a standard measurement. (page 182)

Everyone’s right, but they probably should do a better job of describing why they picked the calculation method they did.

I’ll start.

For Repeat Customer Insights, the Lifetime Value is the sum of the amounts each customer has spent so far. I use the actual amounts because that’s most realistic. Averages lose outliers which can make it harder to find your really great customers (and really bad ones).

That said, I’m now considering adding other Lifetime Value calculations, maybe even a forecasted one. I’ll make sure to label them clearly to not add to the pile of confusion in the industry.

Eric Davis

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