Customer Lifetime Value: Netflix

Now let’s walk through a simple way of calculating lifetime value with Netflix as an example. So there are many components to calculating lifetime value, and we’ll walk them through here. So let’s consider the expected lifetime in months. Netflix is able to tell how many months a customer stays with Netflix and that is 20 months. On average a customer is able to stick with Netflix for about 20 months. The average gross margin that Netflix makes per customer per month is $1.50. For this example, let’s assume that the marketing costs per month per customer is $0. So the net margin is 50- 0. So the customer lifetime value would be 50 x 20, that’s about $1000.

So if Netflix is able to tell what is the average gross margin per month per customer, it knows the lifetime in months that an average customer sticks with Netflix. It can use this historic information to say any new customer that Netflix acquires is worth about 1000 bucks. So if you flip that to see how much Netflix should spend to acquire a new customer, we would say Netflix should not spend more than $1000. So in a formal sense, let’s get a definition of customer lifetime value here. So if you have done net present value, then I would suggest that you think of Customer Lifetime Value as a net present value of customer relationships.

CLV is the expected net present value of future cash flows from a customer relationship. It is a discounted sum of all future customer revenues minus product and servicing and remarketing costs. So this gives you a formal definition of customer lifetime value. And now we’re going to take this definition and see how this translates into an equation And then apply that equation, play with it a little bit using different examples, and see how that will help in determining marketing activities.