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Customer Life Time Value: Dr. Tulika Sood

The document discusses customer lifetime value (CLV), which is the total net profit generated by a customer over the entire duration of their relationship with a business. It provides examples of how CLV is calculated differently depending on the type of business and product/service lifespan. Specifically, it discusses how credit card companies focus on retaining long-term customers and profiting from increased spending over many years, unlike diaper companies whose product is only used for infants. Calculating CLV helps businesses prioritize high-value customers and optimize acquisition spending to maximize returns rather than just focus on low costs.

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HARSH SRIVASTAVA Jaipuria- Jaipur
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54 views19 pages

Customer Life Time Value: Dr. Tulika Sood

The document discusses customer lifetime value (CLV), which is the total net profit generated by a customer over the entire duration of their relationship with a business. It provides examples of how CLV is calculated differently depending on the type of business and product/service lifespan. Specifically, it discusses how credit card companies focus on retaining long-term customers and profiting from increased spending over many years, unlike diaper companies whose product is only used for infants. Calculating CLV helps businesses prioritize high-value customers and optimize acquisition spending to maximize returns rather than just focus on low costs.

Uploaded by

HARSH SRIVASTAVA Jaipuria- Jaipur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CUSTOMER LIFE TIME VALUE

DR. TULIKA SOOD


CRM FRAMEWORK

The stages in the CRM framework are-

Switching
Satisfaction
Trust
Commitment
Loyalty
SWITCHING
SATISFACTION
TRUST
COMMITMENT
MARKET SHARE VS
CUSTOMER SHARE
CUSTOMER LIFE CYCLE
MANAGEMENT
Customer lifecycle management or CLM is the measurement of multiple
customer related metrics, which, when analyzed for a period of time,
indicate performance of a business. The overall scope of the CLM
implementation process encompasses all domains or departments of an
organization, which generally brings all sources of static and dynamic data,
marketing processes, and value added services to a unified decision
supporting platform through iterative phases of customer acquisition,
retention, cross and up-selling, and lapsed customer win-back.
There are different stages in the customer life cycle and there are various
methods to define them. One approach is that of Jim Sterne and Matt
Cutler, as published in 2000 in a paper called “
E-Metrics, Business Metrics For The New Economy”
STAGES IN CUSTOMER LIFE CYCLE
Reach: trying to get the attention of the people we want to reach.
Acquisition: attracting and bringing the reached person into the
influence sphere of our organization.
Conversion: when the people we reach or have a more established
relationship with, decide to buy something from us.
Retention: trying to keep the customers and trying to sell them more
(cross-selling, up-selling).
Loyalty: we would like the customer to become more than a customer:
a loyal partner and even a ‘brand advocate’.
CUSTOMER LIFE CYCLE LOOP
CUSTOMER LIFE TIME VALUE

Relationship marketing focuses on customers' lifetime value or LTV.


LTV is a very key concept—the core of relationship marketing.
In a traditional transactional orientation, organizations are looking for profitability from each
transaction.
When organizations become much more customer-centric, they are looking at a much longer time
duration. And hence, lifetime value is a metric or a measure that you would like to focus on.
So, you may acquire a customer who is not necessarily profitable at the initial stages. But you
see a potential in retaining this customer because you believe that the lifetime value is high.
The Customer Lifetime Value (CLV) is a prediction of the total value (mostly expressed in net
profit) generated by a customer in the future across the entire customer life cycle. CLV also
comes from a CRM and database marketing background. However, it’s used more often in
customer-centric and integrated marketing and in a customer experience context, whereby
the focus is on long-term customer relationships, as is the case in the end-to-end customer
experience.
Let me illustrate this with an example of credit card business & Services.
The customer lifetime value (CLV) is a financial metric used to look at
customer profitability and, when properly calculated, a potential impact on
the different marketing efforts across the customer’s life cycle. Just like
marketing ROI or Return on Marketing Investment it is a financial value. It
is advised to use CLV in order to create value across the customer life
cycle.

The value of the customer lifetime looks at the investments we plan to make for
the customers (retention, sales, promotion, customer service, whatever) and
the return we expect from them. It’s a forward-looking indicator that has
everything to do with the present and the future. CLV is the present value
(expressed in your local currency) of the expected future cash flows from
the customer.
Many organizations, many credit card companies typically offer credit cards to students, mostly in professional colleges.
Students typically have low spending power because they would have either taken loans from the banks, or they would
be depending upon their own savings from their prior work experience, or they would be funded by their parents. So,
initially for the maybe first two years or three or four years, as long as the student is part of a course, an academic
course, the credit card company may not be making too much money from the customer. But the credit card company
believes that the student once he or she completes the course, and gets a job or sets up something of his own, the usage
of the credit card will increase.
When the usage increases typically you have a higher revenue and much higher profitability. So, in LTV, we are focusing
on the net profit of a customer, individual customer over the lifetime. So, in LTV, we focus on retaining the customers
which is customer-centric, through multiple offerings and we want to make sure that the customer is profitable. And
the profitability is not measured at one instance but over multiple interactions over long periods. It could be multiple
years. In insurance business, in financial services businesses, they use a term cradle to grave. So, you can have the
lifetime which matches the individual's life because you are offerings as a financial service company, which can be
used at different stages of the individual's lifetime.

In many other businesses, the usage is limited to the life or useful life of the product. A very contrasting example would
come from baby diapers. Diapers just sold to infants. The mother buys the diapers for the first one or two years and
hence, if you are a diaper company, your lifetime is basically one or two years, when the mother buys the diapers for
the babies. So, net profit over the lifetime of an individual customer is what we measure as lifetime value. And this is
different, this is completely different from a transaction oriented profitability measure which focuses on making profit
out of every transaction, which sort of precludes the possibility of building a relationship with customers.
CLV (Customer Lifetime Value) is a prediction of all the value a business will
derive from their entire relationship with a customer. Because we don't
know how long each relationship will be, we make a good estimate and
state CLV as a periodic value — that is, we usually say “this customer's 12-
month (or 24-month, etc) CLV is $x”.
The Pareto Principle states that, for many events, roughly 80% of the effects
come from 20% of the causes. When applied to e-commerce, this means
that 80% of your revenue can be attributed to 20% of your customers.
While the exact percentages may not be 80/20, it is still the case that some
customers are worth a whole lot more than others, and identifying your
“All-Star” customers can be extremely valuable to your business.
Taking CLV into account can shift how you think about customer acquisition.
Rather than thinking about how you can acquire a lot of customers and how
cheaply you can do so, CLV helps you think about how to optimize your
acquisition spending for maximum value rather than minimum cost.

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