21 Aug Unit 4_MT434_Discussion response
13622Respond or elaborate on the response below:
Customer Lifetime Value (CLV) is basically the concept of discounted cash flow applied to customers. It estimates how much net profit a customer will generate over time, taking into account the time value of money.
The full formula is:
CLV = Σ [(Revenue_t − VariableCosts_t) / (1 + d)^t]
Where:
Revenue_t = revenue generated in period t
VariableCosts_t = variable costs associated with serving the customer in period t
d = per-period discount rate
t = time period (e.g., months)
In simpler terms, for each period, take the contribution margin (revenue minus variable costs), discount it to present value, and sum across all periods. This helps account for both profitability and time.
For businesses with relatively stable conditions—like subscription services with steady pricing, churn, and costs—you can use a simplified approximation:
Approximate CLV = Contribution Margin per Period / (Churn Rate + Discount Rate)
This shortcut is derived from summing a geometric series and assumes constant churn and margin over time.
Example:
Suppose a streaming service charges $12 per month and incurs $5 in monthly variable costs. That gives a $7 monthly contribution margin. If the churn rate is 3% per month and the discount rate is 1% per month (about 12% annually):
CLV ≈ 7 / (0.03 + 0.01) = 7 / 0.04 = $175
If customer acquisition cost (CAC) is $60, then the LTV:CAC ratio is about 2.9:1. That’s a solid return, and it guides where to focus:
(1) Reduce churn (e.g., improve onboarding, customer support), or
(2) Increase margins (e.g., renegotiate content licensing or adjust pricing).
Key assumptions:
Contribution margin and churn rate are constant
No upselling, cross-selling, referrals, or reactivations
No price changes over time
The discount rate reflects the firm’s cost of capital
If those assumptions don’t hold—like if churn drops after month three or customers often upgrade to a premium tier—it’s better to use the full summation formula or a cohort-based model that accounts for changes over time.
Ethical considerations:
While the math is neutral, its use is not. CLV is great for planning and investment decisions (like justifying better onboarding), but it can be misused—like rationing support based on customer value or enabling discriminatory pricing through proxies.
Best practices:
Use CLV as a strategic planning tool—not to limit access to core services.
Avoid using protected characteristics (or close proxies) in CLV models.
Be transparent about how personalization and retention offers work.
Prioritize improvements that raise the experience for all users, not just high-value ones.
Bottom line: CLV is a powerful metric for long-term thinking—if used responsibly. It should guide ethical growth, not undermine trust.
Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.
About Wridemy
We are a professional paper writing website. If you have searched a question and bumped into our website just know you are in the right place to get help in your coursework. We offer HIGH QUALITY & PLAGIARISM FREE Papers.
How It Works
To make an Order you only need to click on “Order Now” and we will direct you to our Order Page. Fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Are there Discounts?
All new clients are eligible for 20% off in their first Order. Our payment method is safe and secure.