What is Customer Lifetime Value?
Customer Lifetime Value is the amount of revenue a customer will generate over the course of their time as a customer, net of costs. Understanding this is crucial for any business when planning how much to spend on marketing and retention, and for understanding the pay off of different subscription packages.
Why would you need it?
Customer Lifetime Value Modelling enables you to quickly get an understanding of how much new acquisitions are worth. We can use these values to calculate return on advertising spend and as inputs in other models. We can also combine with customer segmentation models to understand how value compares across different customer clusters. Fundamentally, we can use it to identify and retain the highest value customers.
What data is required?
We can build powerful statistical models with quite simple data. At the most basic level all we need are tenure and the latest status for each customer. For more sophisticated models we will need both demographic and behavioural data.
How does it work?
The approach we take depends upon what data you have and what your main objectives are. In some circumstances it is appropriate to take a more traditional statistical approach, developing a survival analysis model. In other circumstances it is better to build a series of machine learning models that make predictions about life time at various stages in the customer journey.
Where have we used it?
We’ve used Customer Lifetime Value Modelling in the publishing and online retail sectors.
