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 and retaining its customers

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 • Truly customized CLTV for highly volatile sectors • Link with the Loyalty Programme

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 = tearRf = Number of referrals generated by each customer each year n = length of customer relationshipAc = Full acquisition costs (for new customer)D = Customer retention rateAcr= Reduced acquisition costs ( existing customer )R t = Revenues earned from the customer in year ‘t’ Ct = Cost of servicing customer in year ‘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 calculatedMa = 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 rateAC = 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.