lifetime value

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The future long-term profitability of a particular customer. There is no clear agreement on how lifetime value can be measured. One technique is to forecast future cash flows for the customer, identify an appropriate discount rate or cost of capital, and then calculate the net present value of the cash flows. This is a relatively simple calculation but it does involve managers making difficult assumptions. One key assumption is customer retention. Managers may not agree on how loyal a customer will be in the future and whether sales will increase or decrease. A company will always be looking at strategies for maximizing the lifetime value of customers. See also customer profitability analysis.

Subjects: Accounting.

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