Welcome to your Virtual Classroom Recorded Session!

Customer Lifetime Value

Instructor: Donovan Pfaff / Henrik Simon

Your Instructor

Donovan Pfaff
Department of Electronic Commerce Johann Wolfgang Goethe-University

Henrik Simon
Department of Electronic Commerce Johann Wolfgang Goethe-University
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Overview

Definition

Calculation Model

Examples

Summary

Definition
SAP AG 2002

Calculation Model

Examples

Summary

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)

Origin in Direct marketing: Method of customer segmentation for marketing campaigns Consequence: Only these customers should be attended to, whose trade-off of costs and customer retention effect is positive Long-term oriented method

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Customer Lifetime Value

Customer Lifetime Value is a longterm and dynamic figure
Average Turnover Optimum Short-term Strategy

Long-term Strategy Customer 2

Customer 1

Today
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Overview

Definition

Calculation Model

Examples

Summary

Definition
SAP AG 2002

Calculation Model

Examples

Summary

Customer Lifetime Value

There are various models to calculate Customer Lifetime Value (CLV) A few elements are part of all CLV models:
Period under consideration of analysis (e.g. month, quarter) Discount rate of a company (cost of capital) Planning horizon (how many periods) Frequency of buying/turnover Average turnover per buying Estimated customer retention

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Customer Lifetime Value

T T t t CLVi = GCi r t / (1 + d ) M i r t 1 / (1 + d ) t0 t0

GCi: Mi: T: r: d: t:

Amount of coverage per customer i Relevant acquistion and marketing costs per customer i Planning horizon Customer retention rate Discount rate Time index

Source: P. Berger/N. Nasr (1998), Customer Lifetime Value: Marketing Models and Applications

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Overview

Definition

Calculation Model

Examples

Summary

Definition
SAP AG 2002

Calculation Model

Examples

Summary

Customer Lifetime Value Example calculation

Year 1 20.000 60% 1,8 $2.980 $107.280.000 70% $75.096.000 $12.600.000 $87.696.000 $19.584.000 1,13 $17.330.973 $17.330.973 $867 Year 2 12.000 65% 2,6 $5.589 $174.376.800 65% $113.344.920 $0 $113.344.920 $61.031.880 1,81 $33.719.271 $51.050.244 $2.553 Year 3 7.800 70% 3,6 $9.106 $244.696.480 63% $161.088.782 $0 $161.088.782 $94.607.698 2,53 $37.394.347 $88.444.591 $4.422

Customers Retention Rate Orders/year Average Order Size Total Revenue Direct Cost Costs Acquisition Cost $630 Total Costs Gross Profit Discount Rate Net Present Value Profit Cumulative NPV Profit CLV
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Source: A.M. Hughes (2001), Using Lifetime Value in Business to Business Marketing

ABC Analysis in Comparison with CLV

Number of Average Total Sales Sales Customers Annual ($) ($) Ranking Basic User 254 $335.736 $86.202.044 4 Light User 15.442 $13.851 $213.887.142 1 Heavy User 44 $2.314.159 $101.822.996 3 Top User 612 $299.007 $182.992.284 2 Others 3.613 $2.176 $7.861.888 5 Total 19.965 $29.695 $592.857.254

Lifetime CLV Value ($) Ranking $145.067 2 $5.914 4 $988.146 1 $127.676 3 $929 5 $12.680

Source: A.M. Hughes (2001), Using Lifetime Value in Business to Business Marketing

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Customer Lifetime Value

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 (Value driver) Aggregated CLV as Customer Equity Drawing on customer equity as indicator for the enterprise value Carrying out marketing campaign management (CRM) according to customer values Aligning pricing and product design with CLV Basis

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Calculation Example RoI

Costs per project Improvement of customer satisfaction, customer retention Improvement of customer lifetime value Improvement of aggregated customer values (segment ) Return on investment (project)

20 Mio. 0.5 2,68 % 35 Mio. 75 %

Source: R. Rust / V. Zeithaml / K. Lemon (2000), Driving Customer Equity

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Research Approaches (Selection)

Customer Lifetime Value in support of marketing decisions (CRM)
i.e. Dwyer, F.R. (1989), Customer Lifetime Valuation to Support Marketing Decision Making also P. E. Pfeifer, J. Cornelsen, H. Diller

Customer retention, pricing and product design on CLV basis

i.e. Krafft, M. (2000), Kundenbindung und Kundenwert

Aggregated CLV: Customer Equity Impact of CLV on shareholder value

i.e. Rust, R.T. / Lemon, K. N. / Zeithaml, V. A. (2000), Driving Customer Equity i.e. Berger, P.D. / Nasr, N.L. (1998), Customer Lifetime Value: Marketing Models and Applications
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Overview

Definition

Calculation Model

Examples

Summary

Definition
SAP AG 2002

Calculation Model

Examples

Summary

Summary
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. Only a few financial figures are needed to work out the CLV of a customer (i.e. margin, planning horizon, discount rate, etc.). Equivalent to the brand equity of a firm you can easily work out its customer equity by aggregating all CLV.
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Thank You For Your Attention!

Contact person: person: Hsimon@wiwi.uni-frankfurt.de Pfaff@wiwi.uni-frankfurt.de Petra.Gajewski@sap.com Lothar.Huber@sap.com

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