Customer Lifetime Value with particular ref. to banks – part I

Mahatma Gandhi once said about banks : “A customer is the most important visitor on our premises. He is not dependent on us; we are dependent on him. He is not an interruption on our work; he is the purpose of it. He is not an outsider on our business; he is a part of it. We are not doing him a favor by serving him; he is doing us a favor by giving us an opportunity to do so.” Now we are seeing it to be true in the present competitive atmosphere of banks. Every bank entices customers by offering different products/channels/facilities. But banks are also aware that no product can be offered at discount to its cost price as stability of bank will be threatened in the long run and also due to more and more statutory bindings. As a compromise, the banks are offering bundle of products at differential loss/gain to its customers.

The main thrust of the bank nowadays to attract customers who are preferring to go to different source base for their loan as well as deposits for stock market, mutual funds etc. It is not only the new customers to attract but also efforts to retain existing customers. It is costly to get new customer than to retain the existing customers. Also when attracting customers and retaining customers, the customer life time value has to be calculated by available data by banks. So to consider the future profit potential of customers, marketing and sales functions of the bank have begun searching the solution for finding out “Customer Life Time Value”. This new concept may change the balance sheet of world banks to treat each customer (segment) as an investment instrument similar to an individual stock in a bank portfolio investment. Based on good customer content, the goodwill value of the bank will be calculated for mergers and amalgamations. This may be called Customer Equity Value (CEV) which is becoming buzzword among marketers. This can be improved by good acquisition and customer retention management strategy geared to improve economic value addition for share holders of banks.

Customer Equity Value is summation of CLV of total existing customers and CLV of new customers where CLV is “the net present value of the likely future stream from an individual customer”.


CEV = Total CLV Existing customers ( in Rs.)+ Total CLV New Customers ( in Rs.)

Where CLV is the net present value of the likely future profit stream from individual customer.

Customer Life Time Value (CLV) is defined as the net present value of the likely future profit and Loss stream from individual customers/groups. This concise definition has the following elements.

  1. Net present value of the likely profit/loss from customers or cluster group of customers.
  2. This is for the full life time value of the customer group. But usually it is worked out for 5 to 10 years based on availability of the data of customer /customer groups for practical purpose and it is kept as a trend for life period unless any significant changes occurred.

There can be winners and losers in the bank on the overall composition of customers. Since changes in the customer behaviour usually are not volatile, CLV formula will be useful to understand the profit momentum of any bank. The customers should never be assumed to always go in the same direction because many times high maintenance customers can be unprofitable regardless of their sales turnover.

The CLV is the expected profit that bank will realize from sales to a particular customer/group in the future. The calculation of CLV involves discounted cash flow for multiple period for customers/groups. The calculation also considers the probability of losing some customers and also getting new customers through satisfied customers. By using the DCF math formula, we can equate the future stream of net cash flow i.e. revenue into a single average discounted amount of profit as on a specified day or year end. The CLV focuses on the customer as the influencer of bank’s profitability rather than the products and services. The CLV gives the measurement ability to evaluate the new customers, not existing customers, who are to be targeted and to be attracted through marketing campaigns. It also gives the limit upto which the bank can spend for acquiring the new customers based on their CLV.

The value of the CLV of a customer is determined by the following revenue and cost factors.


  1. Acquisition cost
  2. Benefits or concession given to parties.
  3. Downward migration.
  4. Bad debt
  5. Customer removal cost.
  6. Renewals and retentions promotions.


  1. Recurring revenues
  2. Up selling and cross selling to customers.
  3. Referred customer revenue

The sum total of all these will constitute Customer Life Time Value.

C R Venkata Ramani


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