Customer Lifetime Value

Misuses and Downsides

NPV vs. Nominal Prediction

The most accurate CLV predictions are made using the net present value (NPV) of each future net profit source, so that the revenue to be received from the customer in the future is recognized at the future value of money. However, NPV calculations require additional sophistication including maintenance of a discount rate, which leads most organizations to instead calculate CLV using the nominal (non-discounted) figures. Nominal CLV predictions are biased slightly high, scaling higher the farther into the future the revenues are expected from customers.NPV vs. nominal prediction