Customer lifetime value (CLV) is the total profit a company can expect to earn from a customer over time of their relationship. A traditional model for calculating CLV can be written as:
. In this formula, GC means gross contribution per customer, r means the retention rate, and d means the rate of discount. This metric is helpful in understanding the reasonable cost of acquisition of a new customer.
A regular customer of Starbucks can determine CLV for his or her own use of this service. In order to calculate gross margin per customer lifespan, one should know Starbucks’ profit margin per customer, customer expenditures per visit, and the number of visits for a certain period. One could assume that Starbucks’ profit margin per customer is 21%, customer expenditures per visit are equal to $6, and the number of visits is 4 times a week (which means 208 times a year and 4160 times per 20 years). Therefore, gross contribution per an average customer can be calculated as
Assuming that the gross contribution per one customer is $5,241.6, the rate of discount for Starbucks is 10%, and the customer retention rate is 75%, CLV can be calculated as:
In other words, Starbucks needs to spend approximately $11,232 in order to acquire a new customer.
Even though CLV represents how much an average customer is worth in terms of money, the above estimate might not be accurate. Firstly, the revenue is not recognized at the future value of money, which makes CLV prediction biased (“Customer lifetime value,” 2019). Secondly, in the formula, profit margin per customer instead of net profit expected is used, which also contributes to a slight bias. Thirdly, the concept of CLV is dynamic, not static, which means that one’s average CLV will be different if the model inputs change (Kumar & Shah, 2015). Therefore, the estimated CLV is not accurate and cannot be used in marketing decision-making.
References
Customer lifetime value. (2019). Web.
Kumar, V., & Shah, D. (Eds.) (2015). Handbook of research on customer equity in marketing. Cheltenham, UK: Edward Elgar Publishing.