CUSTOMER

LIFE TIME
VALUE
INTRODUCTION:
•Companies are getting more closer to their customers than
ever before.
•Digital revolution through databases/ e-data
networks/internet gain better access to consumer knowledge
like their buying patterns, purchase behaviour etc even
individually.
•This ton-loads of information to companies have actually
made marketing robust and dynamic in nature.
•Beyond the traditional focus on mass advertising, firms can
now more accurately recognize and monitor individual
customers to whom tailored communications can be made.
•Marketing has, thus become more engaging and interactive.
•For large companies and MNCs, this was inhibitive earlier
due to the costs involved.
THE ULTIMATE GOAL FOR ANY BUSINESS
IS TO
DEVELOP HIGHLY COMMITTED
CUSTOMERS WHO,
NOT ONLY MAKE REPEAT PURCHASES ,
AND,
GENERATE CONTINUOS REVENUE
STREAMS,
BUT ALSO REQUIRE MINIMUM
MAINTENANCE ALONG THE WAY.
Some customers may not bring profits in their initial purchases, but
the margins from their future expected purchases certainly could
be quite assuring ones.
(Specially where companies upgrade their customers with
new types of prodcts/categories from the existing ones)

Firms therefore need to track initial customer’s

acquisition costs and compare them to the profits to be
generated over the customer’s expected relationship
with the company.
AMUL…
AMUL BUTTER OLD AD
AMUL 2
AMUL ICE CREAM
AMUL CHOCOLATE
AMUL UMBRELLA BRAND.
THESE CALCULATIONS HELP MARKETERS TO
1. DECIDE WHICH CUSTOMERS TO GO AFTER,
2. HOW TO CHANGE THE PROMOTIONAL MIX BASED ON
PAST AND PRESENT TRANSACTIONS,
3. AND IF NECESSARY, WHICH CUSTOMERS TO
DISCONTINUE.
IN ORDER TO DETERMINE CUSTOMER PROFITABILITY,
ONE NEEDS TO HAVE CLEAR SENSE OF CUSTOMER
CHARACTERISTICS.

HISTORICAL DATA SUGGESTS HOW REMUNERATIVE

WERE PROMOTIONS/COMMUNICATIONS FOR
PARTICULAR PRODUCT/S. BASED ON THIS, COSTS FOR
FUTURE PROMOTIONS CAN BE DECIDED.
CLTV or customer lifetime value ~
•measures the value of a customer or group of
customers to a company;
•helps estimate the cost of acquiring a customer &
•also calculates the NPV (Net Present Value) of that
customer’s business during his or her economic life.
The LVC tool is designed to let the user estimate the
cost of acquiring a customer and the NPV of that
customer’s business during his useful economic
life.

Two models are offered –

1. A simple one that looks at a single product and
somewhat simplified assumptions, and
2. A more complex model that allows the user to
examine multiple products with distinct customer
loyalty and repurchase characteristics.
 The models assume that customer acquisition
requires a spending program.

•This includes advertisements, special discount coupons or

giving out of free samples.
•How much it costs the company to reach each potential
customer
•What percentage of customers reached will make an initial
purchase.
•If there are additional costs (such as a rebate) that only
apply to actual customers, those are also calculated.
•This provides a total cost per acquired customer
LIFETIME CUSTOMR VALUE
CALCULATOR

ASSUMPTIONS

CLTV new.xls
BASIC MODEL CALCULATIONS
lifetimevalue.xls
The customer value calculation is an infinite function

At each potential repurchase period, the marketeer must estimate

how many existing customers will continue to buy, a percentage
known as Retention Rate.
One needs to adjust for price inflation;
In the simple model the customer is considered to have an infinite
economic life, and for this, retention rates have to be extremely
high.
(Even at 80% retention, a customer is almost 90% ‘used up' after
just ten years.)
COMPLEX MODEL ASSUMPTIONS
COMPLEX MODEL CALCULATIONS

lifetimevalue.xls
THE CATALOG RETAILER:

A direct catalog retailer is wanting to know whether to go ahead with

attracting new customers using names purchased from a list or by
randomly sending out catalogs.
Cost of sending a catalog (including production & mailing) = $0.5
Co anticipates that by random mailing, the purchase rate = 1%
Response rate from broker’s list = 4%
(By analysing buyer behaviour & demographics of current customers)

Cost of acquiring each name from list = $ 0.2

The direct retailer now wishes to calculate the acquisition costs
associated with each source of potential customers.
The retailer now requires response rate and cost of sending a
catalog to each prospect.
A response rate of 1% means that of 100 catalogs sent, only
one recipient is expected to respond. And a response rate of
4% would mean, of the 25 catalogs sent, one recipient is
expected to respond with a purchase.

Cost of acquiring a customer therefore is:

Acquisition cost=
(No of catalogs needed to get 1 cust) *(Cost of sending a cat.) =

Cost of sending a catalog / response rate

For random mailing: 0.5/0.01 = $ 50
Cost from rented list: 0.7/0.04 = $17.5

Even if the cost of promotion is high, the rate of response being

comparatively higher, cost of acquisition of a customer reduces drastically
STRATEGIC IMPLICATIONS OF CUTOMER LIFE TIME
VALUE ANALYSIS

1. FIRING CUSTOMERS BECOMES EASY (By keeping high price

on least profitableproducts)
2. REWARDING CUSTOMERS: investing more in loyal customers
3. IDENTIFYING CROSS SELLING OPPORTUNITIES: Additional or
related products can be offered individually or in bouquet format by
knwoing their likes and dislikes and purchase patterns. Therefore
also signalling line extensions/expansions.