Customer Relationship Management

Lesson 05

Customer Lifetime Value

(CLTV/CLV) and Management of
Customer Value – Lesson 05
Customer Relationship Management by
Alok Kumar, Chhabi Sinha and Rakesh
Sharma
Chapter 2

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 Customer Lifetime Value (CLTV):
Its Meaning and Measurement

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CRM and Current Segmentation
• With the introduction of CRM as a
discipline, rather than a technology, there
has been a resurgence of interest in
customer profiling and segmentation.
• Current profiling and segmentation are
based on yield-optimised, multi channel /
product segmentation. #

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 Dimensions of Customer Lifetime
Value
• The duration of the ‘customer lifetime.’
• The firm’s share of wallet among its
customers.
• The firm’s success in frequency, up selling
and cross selling to its customers.
• The firm’s costs of acquiring, serving,
selling to and retaining its customers. #

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 CLTV Calculations – (1/2)
• Simply put then, the LTV of any given customer
can be expressed as:
LTV = total revenues – (fixed costs + variables
costs).
• Revenue is fairly straightforward to measure –
one simply adds up the total of all of the orders
placed with the organisation.
• Recently, many companies have started using
activity-based costing to get a realistic and
correct customer cost.

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 CLTV Calculations – (2/2)
• CLTV = Average transaction value x frequency
of purchase x Customer life expectancy
• Average customer lifetime = 1/(1- Retention
rate). Thus, if Retention rate is 90%, then
average customer lifetime is 10 years.
• The correct procedure is to determine the value
for each year, then discount the value at the
appropriate rate and then the values of all the
years are summed up to arrive at the current
CLTV.

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 Using CLTV to Segment The
Customers.
• Using CLTV we can grade customers into
profitability categories.
• Segmenting customers into various
profitability categories allows companies to
pay commensurate attention to the
segments on the basis of profit generated
by respective segments. #

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 Customer Profitability Over A
Period of Time
• Many studies have shown that customer
becomes more profitable with time.
• When firms retain customers, they get higher
share of customer’s wallet at higher profit.
• An increase in sales by one percent to existing
customers, increase profits by 17 percent, while
the same percentage increase to new customers
will yield only 3 percent increase in profit.
• The time, effort and cost of selling to existing
customers are much less compared to those for
new customers. #

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 Skewed Customer Profitability –
(1/5)
• It has been found that a small percentage of
customers contribute to most of the profits and
the bottom customers eat away some part of it.
• The implications are startling – companies
cannot treat “all customers as equals”
• The consequences are that with CRM exercise
in place, the top customers get higher attention
to ensure their retention, the middle ones are
pushed up and the lowest ones are to be
screened for “potentials” and the rest, perhaps,
diverted. #
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 Skewed Customer Profitability –
(2/5) – The Product-Customer Grid

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 Skewed Customer Profitability – (3/5)
The “80/20” Customer Pyramid

Most Profitable What segment spends more with

Customers us over time, costs less to maintain,
Best
Customers spreads positive word of mouth?

Other
Customers
What segment costs us in
time, effort and money yet
does not provide the return
we want? What segment is
Least Profitable difficult to do business with?
Customers
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 Skewed Customer Profitability – (4/5)
The Expanded Customer Pyramid
An important activity of CRM driven marketing is
to upgrade each segment to the next one.
Most Profitable
Platinum What segment spends more with
Customers us over time, costs less to maintain,
spreads positive word of mouth?
Gold

Iron

What segment costs us in

Lead time, effort and money yet
does not provide the return
Least Profitable we want? What segment is
difficult to do business with?
Customers

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 Skewed Customer Profitability –
(5/5)
• Thus, one has to adopt different strategies for
different customer groups:
– build stronger bonds with top grade customers so that
they do not get ‘poached’;
– activity-based analysis has to be done with middle
group of ‘potentials’ so that cost of servicing these
customers get reduced; in addition cross selling and
up-selling can be done to increase profitability the
customers;
– an analysis has to be done of the bottom group of
customers who can be pushed up to ‘potentials; for
the rest, lower cost channel is to be encouraged.
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 Yield Optimisation
• Besides identifying profitable customers
and grade them, it is also sensible to
identify profitable products. Progressive
companies identify the product-customer
mix that yield maximum profit and thus,
pay more attention to the most profitable
combination. #

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 Customer Value Management –
(1/6)
• Khalid and Scott have defined customer
value management as the systematic
approach to:
– Understand what causes customer purchase
and repurchase behaviour.
– Predict the future purchase behaviour of
customers and potential customers.
– Maximise future purchase behaviour by
managing the predictors.
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 Customer Value Management –
(2/6)
The process of determining customer value
involves the following steps:
2. Of all the value 3. How well or poorly
dimensions that target are we doing in
1. What do target
customers want, delivering the value
customers value?
which are the that target
most important? customers want?

4. Why are we doing

5. What are the target
poorly or well in
customers likely to
important
value in the future.
value dimensions?

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 Customer Value Management –
(3/6)
• The overarching strategy of CVM is to
deliver better value proposition than the
strongest competitor in each targeted
market segment.
• In a customer value management road
map, there are the following management
phases:
– (1/8) Needs and value-based segmentation,
– (2/8) Value proposition development

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 Customer Value Management –
(4/6)
– (3/8) Product and service delivery
– (4/8) Business operation metrics
– (5/8) Integrated channel strategy
– (6/8) Customer service
– (7/8) Expanding customer relationship and
– (8/8) Migrating customers to new
channels/segments #

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 Customer Value Management –
(5/6) - Benefits
• Importance of CVM - The implementation
of relationship migration strategy for select
accounts have resulted in win-win situation
at Tata Steel as well as for many of its
CVM customers.
• Moving from ‘opinion based’ to ‘data
driven’ decision making. #

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 Customer Value Management –
(6/6) - Benefits
• Changing nature of dialogue with the
customer – CVM has resulted in creation
of knowledge platforms to relate to the
customers across all organisational levels.
• Bringing in accountability in organisational
functions
• Increased responsiveness to customer
needs #

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