Issues in Computing Customer Lifetime Value
This chapter addresses the challenging details in computing LTV that are all-too-easy to ignore. We focus particularly on the appropriate discount rate and appropriate costs. We draw from standard corporate finance and the CAPM model to derive the appropriate discount rate.We discuss the application of activity based costing (ABC) in computing costs. We advocate that the only costs appropriate for LTV calculations are those that change as a function of the number of customers within the particular application at hand (i.e., variable costs). We conclude with a discussion of incorporating marketing response and customer externalities in LTV calculations.
KeywordsDiscount Rate Variable Cost Certainty Equivalent Customer Segment Online Banking
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