Customer Lifetime Value and Market Segmentation

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Marketing Management
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Customer Lifetime Value
The customer lifetime value is defined as the amount that a customer is expected to
spend in purchasing products of a company during their lifetime. Simply, customer lifetime
value is a tool to understand the customers and their purchase behavior. This is an approach that
is useful to know the expected value or amount that a business can generate in the future from
their marketing strategies or tactics. Customer lifetime value approach helps in investing in a
smarter way to acquire and retain the most profitable customers for the business (Kumar, 2016).
Customer lifetime value is useful for a marketer as it is a tool to retain customers and
differentiating customers based on most profitable customers for the business. All this helps a
marketer to plan the marketing strategies on targeting those customers who are valuable rather
than investing in targeting irrelevant groups. CLV helps a marketer to know the cost that a
company occurs to retain current customers or how this investment can be most profitable for the
business.
Customer lifetime value can be calculated using different ways that are explained below
and which method is best suitable depends on the resources available with the company. Three
approaches to calculate CLV are traditional, historical and predictive. The historical approach for
calculating CLV includes records of customers gross profit sum of purchases (Jain & Singh,
2017). In this approach, two methods can be used that are coherent analysis and average revenue
per user (ARPU).
Method 1: APRU= TR/ CQ
Here, TR= Total Revenue in a specific time period CQ= number of customers in a
specific time period
Method: 2 Cohort analysis is an extension of the above-mentioned approach. Cohort
means a group of people who have the same characteristics and but the products in the same
month. Using this method average revenue per cohort is determined. This method helps in
finding the number of loyal clients in a month, accurate assessment of ad campaigns and
purchasing drops in the months.

Marketing Management
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The predictive approach includes a model of customer transactional behavior and helps in
analyzing what customers want in the future. This method provides insight into customer future
actions. From this method customer lifetime value is calculated using (Ferrentino, Cuomo &
Boniello, 2016).
Method: 3 CLV= T*AOV*AGM*ALT/ No. of customers in a specific period
Here, T= Average transactions per month, AOV= Average revenue from each order,
AGM= Average gross margin, ALT= Average lifespan of customers, CB= customers at the
beginning, CE= customers at the end
AGM= (TR-CS/ TR)*100, ALT= 1/ Churn Rate
Here, TR= Total revenue, CS= Cost of sales, Churn Rate= CB-CE/CB
The traditional approach for calculating customer lifetime value is based on the gross
margin profit received from customers during a specific and retention rate of the company that is
recording or analyzing the percentage of total customers that purchase repeatedly in a particular
time period (Casteran & Meyer, 2017).
Method 4: CLV= GML(R/1+D-R)
Here, GML= Gross margin per customer, R= Retention rate, D= Discount rate
Method 5: Customer lifetime value using a modern approach can be calculated with the
help of Google analytics, lifetime value report of customers that can be calculated through
Google analytics includes data related to customer engagement with the company and repeated
actions of customers during a period. Google Analytics is considered as an effective tool to
collect data related to customers and their actions or interest in the company's product. Many
tools can be used to measure or calculate customer lifetime value to minimize cost. CLV is a
metric that helps in retaining and satisfying customers for a longer time and that improve the
sales of business (Armstrong & Kotler, 2018).
An organization that practices this concept very well is Netflix, the company stated that a
Netflix customer lifetime value is $291.25 and the subscribers on an average stay with the
company for 25 months. Netflix benefits from customer lifetime value as the company is now