Beyond the CLV formula
What methods can we employ to refine the calculation of CLV? A logical first step is to revisit the definition of CLV, understood as “the present worth of the anticipated cash flows from a customer relationship,” which is mathematically represented as follows:
E(CLV) = ∑ t expected net cashflow in period t|alive × P(alive in period t) × discount factor for period t
The formula is basically the expected net cashflow in period t, given that the customer is alive times the probability of the customer being alive at time t times a discount factor for period t.
The formula, as is, is of no practical use. We need to operationalize the terms. The best way to start with that is to look into the Buy Till You Die (BTYD) model for a solution.
The BTYD model
Before we delve into the BTYD model, we need to understand customer base classifications. Customer bases can be classified into two axes:
- Opportunities...
