Customer Lifetime Value — Chapter 2

Introduction to Historical CLV

The simplest approach for calculating CLV is Historical CLV, which computes a customer‘s lifetime value based on what they have previously spent with you. There are two popular approaches for computing historical CLV, one using Average Revenue Per User and the other using Cohort Analysis, both of which are described below. But first, let's discuss some caveats associated with taking a backward-looking approach to customer lifetime value analysis.

The main thing to keep in mind when looking at historical CLVs is that it does not account for time. That is, it puts all of your customers—new and old—into the same bucket when in fact they may behave substantially differently. For example, you may have launched a new product line or tried alternative advertising approaches that brought you customers with different characteristics and behaviors than your previous customers, differences that could result in changing CLVs. Similarly, if you plan to take a different approach in the future, or your customer base begins to shift, prior CLVs may no longer accurately predict future CLVs.

Back to Custora U Library