UK: Modelling Customer Lifetime Value

Last Updated: 27 August 2013
Article by Chris Major

Most Read Contributor in UK, August 2017

How much are my customers worth? Easy to answer now but how about in five years? This three-part blog series considers some challenges in effective Customer Lifetime Value (CLV) calculation and usage, providing considerations and guidelines for structuring model design, foundation and application within your business to drive value from it.

So firstly, how do we model CLV? We see clients across all industries struggling with this question. But why, when the basic calculation seems simple?

CLV = (revenue – costs) x length of customer relationship

Unfortunately, the simplicity of the calculation belies the complexity of each component. For example:

  • Revenue: can I identify my customers individually? Attribute individual spend? Historically? Can I extrapolate their spend pattern?
  • Costs: which costs should I include – variable costs and/or fixed costs? How accurately can I assign costs to individual customers? What costs feasibly reduce with volumes?
  • Length of relationship: can I predict individual customer churn propensity? Can I access the necessary data to predict this? What about the time value of money? Is historical extrapolation appropriate? What about approaching market changes and my business strategy?

Challenges vary widely by industry, company, business model, technology base, business structure and any other business facet. For example, subscription style industries (e.g.  telecomms) traditionally benefit from better customer data, more predictable revenues / costs and historical behaviour, due to their interaction style with their customers. However, the growth of ecommerce and loyalty programmes are allowing retail-style businesses to redress this imbalance, gaining transactional, behavioural and customer data unprecedented in its detail.

 Model accuracy will always be limited by your constraints and means, but application of some simple guidelines can help you approach these challenges in a structured manner that clarifies design assumptions and decisions to provide a stable and robust model:

  1. Use an appropriate measure: a matter of much debate, with contribution margin and net margin the most common measures. The key is to pick the measure appropriate to the objectives of the model. In general, functions that use CLV for individual customer decisions (i.e. target or drop this customer) favour contribution, whilst strategic decision making (e.g. business case development) within finance functions prefer the absorption costing nature of net margin.
  2. Be ruthless with revenue and cost definitions: the boundary between fixed and variable costs is grey at best. All fixed costs become variable in the long term and some "variable costs" are unlikely to be reduced with customer / consumption volumes (e.g. will reducing customers really translate to lower contact centre costs? How flexible is your workforce?). Projected savings are only achievable if revenues and costs are defined according to the model requirements.
  3. Allocate revenues and costs at maximum possible granularity: the model should use value data at the most granular level possible, as the aim is to differentiate between individual customer values. Any aggregation in the model reduces its ability to meet this objective.
  4.  Be clear of model objectives: the applications of CLVs within the business are wide but not uniform. Different functions have different requirements and multiple models may be required. Effective stakeholder engagement and requirements gathering in the design phase is essential to drive adoption and acceptance of the outputs.
  5. Create a stable and well governed model platform: multiple models will naturally diverge but the fundamental assumptions and calculations of the model must be consistent for reconciliation purposes and to ensure the business acts in a cohesive manner (See next instalment for details).
  6. Select a model that optimises accuracy given your means and objectives: all models face constraints that naturally limit their accuracy, be it the data, technology or analytics capability within your organisation. What is important is that your model has the fundamental accuracy that allows it to gain buy-in within the business for its adoption and application.
  7. Understand the validity of your model and use it accordingly: many of the organisations we work with on CLV have models already but lack of faith in its outputs. This leads to dispersed and inconsistent usage within silos across the business. Key to overcoming this is how the model is 'sold' to its stakeholders – no model provides a perfect prediction of the future. What is important is that the business understands the reliable aspects of your model and what it can and cannot be used for. We see many models that provide good directional insight but are mothballed because they cannot be reconciled to an established metric.

CLV models vary hugely in complexity, predictive capability and their ability to drive value for the business. These can be enabled or limited by many factors, some inherent to the business and some which can be overcome. This instalment has touched on some considerations in model build. The next instalments in this three-part series will look at key considerations in founding a stable modelling platform and effective application of CLVs within the business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.