The past profit that a customer
has produced for the firm is the sum of the margins of all the products
purchased over time less the cost of reaching that customer. These costs include
any that can be broken out at the individual customer level, through such efforts
as direct mail and sales calls. Note that mass advertising would not be part of this
formula. The cost could be assigned to individual customers by computing a per
customer dollar amount; but because it is the same for each customer, it would
not affect the rank ordering of the customers in terms of their profitability. LCV
is calculated by adding forecasts for the major parameters and discounting back.
This obviously requires assumptions about future purchasing, product and marketing
costs, as well as how long the customer can be expected to remain with
the firm. Generally, this will result in a number of scenarios for each customer
depending upon these assumptions.