CLV puts a value on the customer relationship; thus, it is a key component in the CRM system. Knowing the customer's value helps an organization determine which customers they want to strengthen their relationship with and which ones they don't. Read this article to explore the concept of customer lifetime value and why an organization needs to utilize it in its decision-making. Focus on the methodology for calculating CLV and think about the variability inherent in each step of the calculation.
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