Traditional marketing metrics such as brand awareness, attitudes, or even sales and share are not enough to show a
return on marketing investment. Financial metrics such as stock price and aggregate profit of the firm or a business
unit do not solve the problem either. Although these measures are useful, they have limited diagnostic capability.
Recent studies have found that not all customers are equally profitable. Therefore, it may be desirable to “fire” some
customers or allocate different resources to different group of customers 1. CLV is a disaggregate metric that can be
used to identify profitable customers and allocate resources accordingly. At the same time, CLV of current and
future customers (also called customer equity or CE) is a good proxy of overall firm value
Fundamentals of CLV
CLV is generally defined as the present value of all future profits obtained from a customer over his or her life of
relationship with a firm. CLV is similar to the discounted cash flow approach used in finance. However, there are
two key differences. First, CLV is typically defined and estimated at an individual customer or segment level. This
allows us to differentiate between customers who are more profitable than others rather than simply examining
average profitability. Second, unlike finance, CLV explicitly incorporates the possibility that a customer may defect
to competitors in the future.CLV for a customer is
Where
Researchers use different variations in modeling and estimating CLV. Some researchers have used an arbitrary time
horizon or expected customer lifetime whereas others have used an infinite time horizon.
1
(Blattberg, Getz, and Thomas 2001; Gupta and Lehmann 2005; Rust, Lemon, and Zeithaml 2004)
b) estimate of average customer lifetime value : annual customer revenue = Rs 500. Average number of
loyal years=20 Company profit margin=10
Customer lifetime value= Rs 1000
Thus we can see that (cost of acquiring new customers) > (customer lifetime value).
Segmenting Customers
Today, companies around the world are increasingly segmenting their customers in
order to increase profitability. Segmenting helps companies to tailor their offerings to
each of the segment. One of the common ways of segmentation is based on loyalty &
profitability. After segmenting customers, companies tailor their offerings, marketing
strategies to convert existing customers to become more loyal and more profitable.
Segmenting helps companies to allocate their marketing resources based on the
customer value. Customer lifetime value give a formalized depiction of a long-term
view of the customers and gives a better picture of what the company is going after.
As marketing strives to become more accountable, we need metrics and models that help us assess the return on
marketing investment. CLV is one such metric. The easy availability of transaction data and increasing
sophistication in modeling has made CLV an increasingly important concept.
i
References
1.Modeling Customer Lifetime Value, Sunil Gupta, Dominique Hanssens, Bruce Hardie, Wiliam Kahn, V. Kumar,
Nathaniel Lin, Nalini Ravishanker and S. Sriram, Journal of Service Research 2006; 9; 139
2. http://www.answers.com/topic/customer-lifetime-value?cat=technology
3. Getting Real About Customer Lifetime Value by Uta Wer ner
4.Marketing Management,Kotler Keller Koshy & jha, 12th ed.
Report Submitted by
R S Raghav