Customer Lifetime Value

Introduction:
As organizations expand their customer base, it becomes increasingly important for them to segment their clientele into different groups. The most logical (& practical) criteria that can be employed for this purpose is customer profitability; however, very often the difficulty in formulating a method for quantifying customer profitability makes the entire exercise prohibitive. This is mainly due to the fact that different departments in the same organization view the concept of profitability from their own characteristic viewpoints. What results is a multitude of contradicting measures and values for the same customer-base. A method of resolving this dilemma is to first come up with a definition of profitability that would find agreement in all quarters and with all the stakeholders in a firm. This is where measures such as LTV come in. Customer Lifetime Value (LTV) is generally accepted as the total net income a company can expect from a customer. Customer value calcul...