Customer Lifetime Value

( CLTV)
First Phase – Manual selection of criteria
Second Phase – Inclusion of socio
economic / geo-demographic data
Third Phase – Data mining
Fourth Phase – LTV based selection
Fifth Phase – Yield optimized , multi
channel / product segmentation
 Dimensions of Customer
lifetime value
• The duration of the ‘customer lifetime’
• The firms share of wallet among its
customers i.e what proportion of the
customer’s purchase in the firm’s
offering categories are captured by
the firms as opposed to its
competitors
• The firm’s success in terms of
frequency of up and cross selling to
its customers so as to increase the
levels and monetary value of their
purchases over time.
• The firm’s cost of acquiring , serving
 Successful CLTV methods
• Connect with overall strategy of the
business
• Link with loyalty that the company seeks to
bring in
• Referrals must be a part of the component
of th CLTV
 ( true loyalty )
• Constant rate of retention and discount not
feasible.
• Risk rate should be associated
• Dynamics of the different sectors must be
incorporated
 Calculating CLTV
 LTV = Total revenue – (fixed costs + varialbes
costs)
• Identify those customers who are most profitable and focus
retention efforts on them
• Find more customers who match the profile of the most
profitable customer
• Calculate which product combination are contributing most
to the profit


 CLV = Average transaction value*Frequency of

purchase *customer life expectancy
 CLTV using Referrals
 Average customer lifetime = 1 /1-retention rate Customer
Lifetime value
 using referrals


 CLTV = D [(R t -Ct ) + Rf ( Ac –Acr ) ] / ( 1+r ) – Ac

 t = tear
Rf = Number of referrals generated by each customer each year

n = length of customer relationship

Ac = Full acquisition costs (for new customer)

D = Customer retention rate

Acr= Reduced acquisition costs ( existing customer )

R
t = Revenues earned from the customer in year ‘t’
C = Cost of servicing customer in year ‘t’
t

 CLTV using Minus Referrals


 CLV = { ∑(Ma - Ca ) r (a-1) /(1+i)a } – AC

*N/a-1


N= number of years over which the relationship is calculated

M
a = the margin the customer generates in th year ‘a’
Ca = the cost of marketing communication or promotions targeted to
the customer in the year ‘a’
r = the retention rate


r (a-1) =survival rate for year ‘a’
i = the interest rate

AC = acquisition cost

 CLV to segment customers
• Pareto rule ( 20% and 80% )
• Top 20% is ‘maxed out’ using every
service that they need, focus on
retaining them and should not go
on cross selling and up selling
• Of the 80% the bottom 20% will be
low profit and gives 1% profitability
• When the remaining 60% precision is
the key to get ROI

 Customer Value
Management
• Understand what causes customer
purchase and repurchase behavior.
• Predict the future purchase behavior
of customers and potential
customers.
• Maximize future purchase behavior
by managing the predictors.