CUSTOMER LIFETIME VALUE

& ITS USEFULNESS

GROUP 3
 CUSTOMER LIFETIME VALUE
• In marketing, customer lifetime value (CLV or often CLTV), lifetime
customer value (LCV), or life-time value (LTV) is a prediction of
the net profit attributed to the entire future relationship with a
customer.
• Customer lifetime value can also be defined as the monetary value of
a customer relationship, based on the present value of the projected
future cash flows from the customer relationship.
• Customer lifetime value is an important concept in that it encourages
firms to shift their focus from quarterly profits to the long-term health
of their customer relationships.
• Customer lifetime value is an important number because it represents
an upper limit on spending to acquire new customers.
• For this reason it is an important element in calculating payback of
advertising spent in marketing mix modeling.
• From the pareto principle, roughly 80% of effects come from 20% of
causes i.e 80% of your revenue comes from 20% of customers.
• find these valuable customers and retain them by constantly winning
them over again and again.
• Taking the CLV into account, you can shift your thinking about
customer acquisition
• Rather than thinking about how to acquire more customers cheaply,
CLV helps you to think about how to optimize your acquisition
spending for maximum value instead of minimum cost.
LIFE TIME VALUE OF THE COSTOMER
Cont’
• Most marketing managers make the mistake of thinking that every
customer is the same, well they are not.
• From the illustration above, we see that there is 20%that fall into the in
active and non profitable bunch, 60%, which is where most customers
fall into the active and profitable bunch, then lastly on the right we
have the other 20% who are very active and very profitable.
• The 20% on the right are also know as brand evangelists, they refer
new customers, upgrade frequently, and purchase simply because they
love your product or service.
• Each customer is in a different segment and how we market to them is
also going to be different.
CRM Analytics
• Refers to all programs that analyze data about an organisation’s
customers and present it in such a way that results in better and quick
business decisions being made.
• E.g. profitability analysis
 formula
• (Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)

• Example: you run Diaper Business and a particular customer, a mother of twins
buys $10 worth of diapers per month. She is going to buy the diapers for the
next 3 years. Then the lifetime value of the customer is (according to the
formula above):
Solution
• $10 per month x 12 months x 3 years = $360.
• This means the customer is worth a lifetime value of $36,000.

• Once we calculate CLTV we know how much the company can spend
on paid advertising such as Facebook ads, YouTube ads, Google etc. in
order to acquire a new customer.
Discount Rate
• If the customer is estimated to bring $10 per month over the 3year
period, then their value today can be found by discounting the Future
Value by the current discount rate e.g. 10%
 Discount Rate
1− 1+𝑟 −𝑛 1+𝑟 𝑛−1
𝑃𝑉 = 𝐴 𝐹𝑉 = 𝐴
𝑟 𝑟
−36
0.1 0.1 36
1− 1+ 1+ 12 −1
𝑃𝑉 = 10 12 FV=10 0.1
0.1 12
12
=$417.82
=$309.91
Usefulness of CLV
1. Saves money:
Cont’
• It’s cheaper to retain old customers than find new ones. When you
know your customer you know what benefits they seek and you can
focus your resources on these, (target market).
• Channels for finding new customers are also expensive and time
consuming. Radio ads, T.V., newspapers, Google and social media ads
all cost you money.
 2. Saves time

By concentrating on your target market and loyal customers, you’ll save

time and money by not wasting effort on those not worth the headache!
 3. more sales

• You’ve already warmed up your customer from all that regular

contact. Now you can send them your latest promotion with a
persuasive call to action.
 4: NATURALLY DIVIDES A TARGETED MARKET
INTO MEANINGFUL SEGMENTS
•
Customer segmentation naturally occurs when applying customer
lifetime value.
• This benefits every segment because it allows a business to identify
what specific needs each segment requires.
• In doing so, there’s a chance to improve the value proposition to
each group so that every segment can experience an increase in
growth.
 5 encourages brand loyalty
• Regular contact enables you to foster brand loyalty.
• Always remember to give your customer something they will benefit
from because the customer will always ask “whats in it for me?”
WEAKNESSES
A COMPANY MAY PUT ON BLINDERS TO FOCUS
ON JUST ONE CORE GROUP OF CUSTOMERS
• Finding your best customers and then cloning them or winning them
back for repeat business is important.
• It’s also important to give attention to the other customer segments
who might not be your best, but still contribute a fair amount to your
bottom line.
• If only one core segment receives attention, it’s entirely possible for a
company to lose money instead of make it.
FUTURE IS DIFFICULT TO PREDICT
• Even when using a tool like customer lifetime value, it is important to
remember that this is just a tool.
• It’s a way to think about the future and make plans – just not
permanent ones.