Presentation on

customer lifetime value

customer life cycle- definition
• The series of steps a customer goes through when she
considers purchasing, using, and maintaining loyalty to a
product or service describes the customer life cycle
Three Main Goals of
The Customer Life Cycle Approach
1. Attain new customers and increase the number of
relationships
2. Increase the profitability of those relationships
3. Increase the duration of profitable relationships

Creating Customer Life Cycles

• Collecting and analyzing data
• Purchase frequency
• Recency
• Average purchase size
• Number of customer visits and contacts over time
Example
 Definition

• Customer Lifetime Value

„ Customer Lifetime Value means the economic value of

customer relations during the whole period of relation between
customer and company.“
(Source: Krafft (2000) “Kundenbindung und
Kundenwert“)
• Consequence:
Only these customers should be attended to, whose trade-off
of costs and customer retention effect is positive
• Long-term oriented method
Customer Lifetime Value Creation
Program
Planning Strategy Implementation
 Create cross-functional  Analyze churn  Create a steering
teams to achieve value behavior – the degree committee to ensure
creation results to which customers implementation
turn over
 Communicate  Create a team for each
internally about  Gather financial data action plan developed
customer lifetime value about customers
 Launch test programs
creation ideas
 Calculate the lifetime and pilot programs
 Agree on realistic value of a customer
 Measure results
objectives for value
 Segment customers
creation  Adjust plans according
based on calculations
to results obtained
 Create a detailed of lifetime value
implementation plan
 Simulate the use of
that includes a
value creation levers
calendar, resources
with each segment
required, and tools to
be used
 Importance

• CLV is increasingly used as a measurement category of

Customer Relationship Management (CRM):
• Identification of profitable customer segments
• Impact of new channels of distribution (multi channeling) on
customer value
• Aggregated CLV as “Customer Equity”
• Carrying out marketing campaign management (CRM)
according to customer values
• Aligning pricing and product design with CLV Basis
Use of CLV
• To determine customer profitability, salespeople
can use CLV to segment customers into groups
based on:
• Revenues generated
• Including frequency of purchase and behaviors
• Costs incurred
• Products purchased, channels used, service
levels
Financial Motivations for the CLV
• As a financial analyst, knowing the CLV of the customer
base increase the knowledge on the main company.
Marketing Motivation of the CLV
By knowing the CLV of the customers, one can

• Focus on groups of customers of equal wealth

• Evaluate the budget of a marketing campaign

• Measure the efficiency of a past marketing campaign by

evaluating the CLV change it incurred
Commercial Motivation for the CLV
• By knowing the CLV, someone in a branch office can
• Focus on the most valuable customers, which deserve to
be closely followed
• Neglect the less valuable ones, to which the company
should pay less attention

 At each decision level, to know the CLV allows to make

efficient actions.
Measurement
A Pragmatic Approach
• The net cash flow can be replaced as
( pi ,t  ci ,t ) ri ,t
CLVi  t 0
h
 ACi
(1  d ) t

where
• pi,t = price paid by a consumer i at time t
• ci,t = direct cost of servicing the customer at time t
• ri,t = probability of customer i repeat buying or being alive at
time t
• ACi = acquistion cost for the customer i
• h = time horizon for estimating the CLV
• d = discount rate
Transactions prediction approach
• With the transactions prediction approach, the CLV is designed
as
xi ,t  mi ,t
CLVi  t 0
h

(1  d )t
• Where
• xi,t = number of transactions yielded by customer i in the
period t
• mi,t = profit per transaction yielded by customer i in the
period t
• d = discount rate
• h = time horizon of the prediction
RFM Approach
• Recency (R): the latest purchase amount.
• • Frequency (F): the total number of purchases during a
specific period.
• • Monetary (M): monetary value spent during one specific
period.
Continued……
• The first dimension is recency, which indicates the length of
time since the start of a transaction.
• The second dimension is Frequency, which indicates how
frequently a customer purchases products during a particular
period.
• Finally, Monetary value measures the amount of money that
customer spending during a period
conclusion
• Customer Lifetime Value means the economic value of
customer relations during the whole period of relation
between customer and company.
• Therefore the Customer Lifetime Value is a very important
business performance figure.
• As it allows to measure the value of a customer of a
company in monetary meanings for the first time,
Customer Lifetime Value is of increasing importance in
various industries.
Difficult prediction
• CLV Prediction is difficult because:
• The retention rate is unknown
• The future margin/profit per transaction is
unknown
• The future number of transactions is unknown.
References
• www.Marketingprofs.com
• Scribd.com
• Authorstreem.com
• “A Business Guide to Customer Relationship Management
• By Jill Dyche