What Works

• To compute lifetime value, you need a customer database that includes transactions. You need to be able to estimate the revenue and the costs in order to compute the profit from each transaction.

• You use past history to determine the retention (or repurchase) rate.

• Lifetime value can at first be computed for all customers as a group, but once it has been developed, it should be determined for customer segments.

• The LTV of an individual customer is derived from the LTV of the segment that includes that customer, adjusted for the products the customer owns and other factors that seem to determine the customer’s particular LTV.

• Lifetime value produces numbers that can eventually be audited after the fact. A year later, you can go back and see what the retention (repurchase) rate was; what the spending rate was; what the marketing expenditures, the profits, and the discount rate were. It is not smoke and mirrors.