Categories of customer

relationships
Retention situations Migration situations
• Applied with the present • A customer who does not
customers (after they buy at a given point of
make first time purchase) time or from a given
• Magazine subscriptions, catalogue may still be
Insurance, Telecom pre- considered as a customer
paid as he/she may buy at
• Key is, not all customers some other point in future
are good & worth
retention. Some are • Retail, Telecom post-paid
considered as ‘lost for & Banking
good’ • Firm may not know when
• Firm knows when the the relationship is over.
relationship is over This is one of the biggest
challenges for the
marketers
Most CLV calculations are made in customer retention
situations
 Customer Lifetime Value
• Is the present value of all future revenues obtained from a customer over
his/her life of relationship with the firm
• How much each customer is worth in monetary terms
• Can be estimated at individual or segment level
• Similar to Discounted Cash Flow approach used in finance. But the
difference is, unlike finance, CLV provides clues about the possibility that a
customer may defect to competitors in future
• Rationale is
– To differentiate between customers who are more profitable than
others rather than simply examining average profitability
– To place greater emphasis on customer service and long-term
satisfaction rather than on maximizing short-term sales.
– How much marketing dept. should spend to acquire each customer
– If a customer acquisition costs say Rs.25 and his lifetime value is Rs.40,
then the customer is judged to be profitable and acquisition of
additional similar customers is acceptable.
 CLV terms used
• Churn rate: % of customers who end their
relationship with the co. in the given
period. One minus Churn rate gives
retention rate
• Discount rate: Cost of capital used to
discount future revenue from a customer.
Current interest is usually used for
discount rate
• Retention cost: Money spent to retain
existing customer. Includes, promotional
costs, loyalty incentives, billing, customer
support costs, etc.
CALCULATION OF Acquisition Year Second Year Third Year
CLV
Customers 1,00,000 60,000 42,000

Retention rate 60% 70% 80%

Orders per year 1.8 2.5 3

Avg order size Rs. 90 Rs. 95 Rs. 100

Total revenue Rs. 1,62,00,000 Rs. 1,42,50,000 Rs. 1,26,00,000

Costs 70% 65% 65%

Cost of sales Rs. 1,13,40,000 Rs. 92,62,500 Rs. 81,90,000

Acquis/Mktng cost Rs. 55 Rs. 20 Rs. 20

Marketing costs Rs. 55,00,000 Rs. 12,00,000 Rs. 8,40,000

Total costs Rs. 1,68,40,000 Rs. 1,04,62,500 Rs. 90,30,000

Gross profit Rs. -6,40,000 Rs. 37,87,500 Rs. 35,70,000

Discount rate 1 1.16 1.35

NPV Rs. -6,40,000 Rs. 32,65,086 Rs. 26,44,444

Cum NPV profit Rs. -6,40,000 Rs. 26,25,086 Rs. 52,69,531

CLV Rs. -6.4 Rs. 26 Rs. 53