Customer Lifetime Value
Customer Lifetime Value (SMALL BOOK 167-177) * Customer lifetime value (CLV), is the net present value of the cash flows attributed to the relationship with a customer. * The use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales. * Two approaches to CLV: * Disaggregate (“spreadsheet”)– Complex and cumbersome, but allows you to build in any assumptions you want and see how they affect the result. * Aggregate (“analytic”) – Makes (often strong) assumptions, hard to see the mechanism. Easy to remember and compute, allows you to focus on the big factors.
BASIC CLV MODEL: ( a.k.a Margin Multiple ) It reflects the proportion of one’s per-customer profit margin you expect to recoup over time. m: profit margin per period r: retention rate i: discount rate
Key Insights | Assumptions | * Retention and loyalty are key to long-term value. * Other factors (e.g., discount rate) only have an impact when retention is high. All the handwringing about what discount rate to use is irrelevant in many real-world situations. * Margin matters, but it is independent of the other factors. * Customer-based costing is important, and often absent. | * Profit margins are constant * Defection rates are stable over time * Discount rates are stable over time * The customer’s lifetime is infinite | * | Implications | * | * It is low when business is risky (i.e., the discount rate is high) and high when retention is high. * If your churn is too high, it’s hard to make money from your customers. * Conversely, loyal customers provide substantial value. * Retention rate typically has a greater impact than discount rate. In other words, marketing actions have a greater impact on CLV than does “financial engineering”. |
EXAMPLE:
A health club is opening a new location and is
BASIC CLV MODEL: ( a.k.a Margin Multiple ) It reflects the proportion of one’s per-customer profit margin you expect to recoup over time. m: profit margin per period r: retention rate i: discount rate
Key Insights | Assumptions | * Retention and loyalty are key to long-term value. * Other factors (e.g., discount rate) only have an impact when retention is high. All the handwringing about what discount rate to use is irrelevant in many real-world situations. * Margin matters, but it is independent of the other factors. * Customer-based costing is important, and often absent. | * Profit margins are constant * Defection rates are stable over time * Discount rates are stable over time * The customer’s lifetime is infinite | * | Implications | * | * It is low when business is risky (i.e., the discount rate is high) and high when retention is high. * If your churn is too high, it’s hard to make money from your customers. * Conversely, loyal customers provide substantial value. * Retention rate typically has a greater impact than discount rate. In other words, marketing actions have a greater impact on CLV than does “financial engineering”. |
EXAMPLE:
A health club is opening a new location and is