Customer Lifetime Value

Unhappy Families

Customers are like Tolstoy’s unhappy families, all different in their own way. To value a consumer business, you need to understand customer lifetime value (CLV), which is driven by acquisition, monetization, and retention.

Because these variables are dynamic and interactive — and there’s no average customer — calculating CLV is difficult, as Michael Mauboussin, Head of Research at Counterpoint Global, writes in a recent report. Mauboussin is the finance equivalent of Daniel Kahneman, who wrote Thinking Fast and Slow. His report illuminates the tradeoffs and complexities of forecasting consumer businesses.

Customer Lifetime Value (CLV)

CLV is composed of customer acquisition cost, monetization, and retention:

• Customer Acquisition Cost (CAC): How much does it cost to acquire a customer? This is mostly marketing like online advertising and promotions (15% off your first order), but also includes content and product spending. For example, one rationale for Spotify giving Joe Rogan a $100M contract was that exclusive content would attract new users. Some portion of this expense should be included in Spotify’s CAC.
• Monetization: How much does each customer spend? This boils down to average order value and purchase frequency. Larger basket sizes and more frequent purchases mean more revenue.
• Retention: How long do customers stick around for? Are transactions one-off or…