## What’s Expected Customer Lifetime Value?

Expected Customer lifetime value (eCLV) is a term which describes the net profit resulting from the future relationship with a customer. eCLV is an interesting concept as it will show you how much you can spend on acquiring a new customer. A calculation of eCLV generally sums the expected profits in future time periods and estimated retention rate. Most models will also discount the cashflow. To make it a bit more concrete, you can find a simplified calculation of the eCLV below. In this example we expect \$100 of net profit each year and a retention rate that drops 25 percentage points each year. We end up with an expected CLV of \$250. \$100 * 100% (year 1) + \$100 * 75% (year 2) + \$100 * 50% (year 3) + \$100 * 25% (year 4) + \$100 * 0% (year 5) = \$250

While this number we end up with is actionable (i.e. we know how much we can spend on acquiring the customer) it is not necessarily correct. This traditional definition of eCLV has a number of pitfalls. The most notable ones are uncertainty and missing details. The first aspect – uncertainty – will always be present, i.e. the retention rate or the customer’s spending ends up differently then expected. Uncertainty also exponentially increases with the expected lifetime of a customer; we might be able to give relevant predictions for the coming year, but it becomes much more difficult to do so for the coming ten years. The second aspect – not enough detail – comes down to aggregation. Many of these eCLV models aggregate too much and thus do not take into account the specificity of certain customers. I.e. the eCLV could be wildly different for a 35 year old mother of two versus an 18 year old student.