Customer Relationship Management

Lesson 05

Customer Lifetime Value

(CLTV/CLV) and Management of
Customer Value – Lesson 05
Customer Relationship Management by
Alok Kumar, Chhabi Sinha and Rakesh
Sharma
Chapter 2

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 Customer Lifetime Value

Caterpillar’s
market
success
can be
attributed in
part to its
focus on
maximising
total
customer
value

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 Customer Lifetime Value (CLTV):
Its Meaning and Measurement

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 Customer Lifetime Value (CLTV or
CLV or LTV) – (1/6)
• Marketers should understand that first
transaction is only a beginning. Customers
who stay with the company over a long
time bring in additional revenue at the
lowest cost.
• Customer Lifetime Value (CLTV/CLV/LTV)
means maximising long-term profitability of
customers. (that is, higher profits from
customers)
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 Customer Lifetime Value (CLTV or
CLV or LTV) – (2/6)
• CLV describes the net present value (that
is, discounted present value) of the stream
of future profits expected over the
customer’s lifetime purchases.
• Expected revenue over the coming years
minus expected cost of attracting, selling,
servicing and retaining the customer will
yield CLV by applying suitable discount
rate. #
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 Customer Lifetime Value (CLTV or
CLV or LTV) – (3/6)

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 Customer Lifetime Value (CLTV or
CLV or LTV) – (4/6)
• Gupta and Lehmann illustrate their
approach by calculating the CLV of 100
customers over a 10-year period (see
Table 5.3). In this example, the firm
acquires 100 customers with an
acquisition cost per customer of $40. (contd)

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 Customer Lifetime Value (CLTV or
CLV or LTV) – (5/6)
• (From last slide)Therefore,
in year 0, it spends
$4,000. Some of these customers defect
each year. The present value of the profits
from this cohort of customers over 10
years is $13,286.52. The net CLV (after
deducting acquisition costs) is $9,286.52,
or $92.87 per customer. #

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 Customer Lifetime Value (CLTV or
CLV or LTV) – (6/6)
• Customer Lifetime Value (CLV) lends a
fresh way of looking at customers with
long-term profitability view rather than
looking at the profitability of each
transaction.
• As acquiring new customers becomes
more and more expensive, holding on to
existing customers and maximising profits
is an eminently justified strategy.
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 Simplified View of CLTV
Calculations – (1/2)
• Simply put then, the lifetime value of any
given customer can be expressed as:
= total revenues – (fixed costs + variables
costs). (revenue minus cost)
• = Average transaction value (revenue
minus cost = profit) x frequency of
purchase x Customer life expectancy. #

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 Simplified View of CLTV
Calculations – (2/2)
• Average customer lifetime = 1/(1-
Retention rate). Thus, if Retention rate is
90%, then average customer lifetime is 10
years.
• The correct procedure is to determine the
value for each year, then discount the
value at the appropriate rate and then the
values of all the years are summed up to
arrive at the current CLTV.
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 Drivers of Customer Lifetime Value
• The duration of the ‘customer lifetime.’
• The firm’s share of wallet among its
customers.
• The firm’s success in frequency, up selling
and cross selling to its customers.
• The firm’s costs of acquiring, serving,
selling to and retaining its customers. #

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CLTV and Customer Segmentation

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CLTV and Customer Segmentation
• With the introduction of CRM as a
discipline, rather than a technology, there
has been a resurgence of interest in
customer profiling and segmentation.
• Current profiling and segmentation are
based on yield-optimised, multi channel /
multi product segmentation. #

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 Using CLTV to Segment The
Customers.
• By using CLTV we can grade customers
into profitability categories.
• Segmenting customers into various
profitability categories allows companies to
pay commensurate attention to the
segments on the basis of profit generated
by respective segments. #

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 Customer Profitability Over A
Period of Time

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 Customer Profitability Over A
Period of Time – (1/2)
• Many studies have shown that a customer
becomes more profitable with time.
• An increase in sales by one percent to
existing customers, increase profits by 17
percent, while the same percentage
increase to new customers will yield only 3
percent increase in profit. #

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 Customer Profitability Over A
Period of Time – (2/2)
• When firms retain customers, they get
higher share of customer’s wallet at higher
profit.
• The time, effort and cost of selling to
existing customers are much less
compared to those for new customers. #

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 Skewed Customer Profitability –
(1/8)
• It has been found that a small percentage
of customers contribute to most of the
profits and the bottom customers eat away
some part of it.

• The implications are startling – companies

cannot treat “all customers as equals” #
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 Skewed Customer Profitability –
(2/8)
• The consequences are that with CRM
exercise in place, the top customers get
higher attention to ensure their retention,
the middle ones are pushed up and the
lowest ones are to be screened for
“potentials” and the rest, perhaps,
diverted. #

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 Skewed Customer Profitability –
(3/8) – The Product-Customer Grid

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 Skewed Customer Profitability – (4/8)
The “80/20” Customer Pyramid

Most Profitable What segment spends more with

Customers us over time, costs less to maintain,
Best
Customers spreads positive word of mouth?

Other
Customers
What segment costs us in
time, effort and money yet
does not provide the return
we want? What segment is
Least Profitable difficult to do business with?
Customers
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 Skewed Customer Profitability – (5/8)
The Expanded Customer Pyramid
An important activity of CRM driven marketing is
to upgrade each segment to the next one.
Most Profitable
Platinum What segment spends more with
Customers us over time, costs less to maintain,
spreads positive word of mouth?
Gold

Iron

What segment costs us in

Lead time, effort and money yet
does not provide the return
Least Profitable we want? What segment is
difficult to do business with?
Customers

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 - Skewed Customer Profitability –
(6/8) The 150 – 20 Rule
20% of the most profitable
customers deliver 150% of
the profit and 20% of the
least profitable customers
lose 100% profit

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 Skewed Customer Profitability –
(7/8)
• Thus, one has to adopt different strategies
for different customer groups:
– (1/3) build stronger bonds with top grade
customers so that they do not get ‘poached’;
– (2/3) an analysis has to be done of the bottom
group of customers who can be pushed up to
‘potentials; for the rest, lower cost channel is
to be encouraged.

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 Skewed Customer Profitability –
(8/8)
• Thus, one has to adopt different strategies
for different customer groups:
– (3/3) activity-based analysis has to be done
with middle group of ‘potentials’ so that cost of
servicing these customers get reduced; in
addition cross selling and up-selling can be
done to increase profitability the customers;

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 Hence, customer data analysis is a
sine qua non for a company!
Harrah’s uses
sophisticated
customer
analytics to
guide
marketing
activities,
including
filling
(booking)
rooms in its
Paris Las
Vegas hotel
and casino
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 Yield Optimisation
• Besides identifying profitable customers
and grade them, it is also sensible to
identify profitable products. Progressive
companies identify the product-customer
mix that yield maximum profit and thus,
pay more attention to the most profitable
combination. #

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 Customer Value Management

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 Customer Value Management –
(1/6)
• Khalid and Scott have defined customer
value management as the systematic
approach to:
– Understand what causes customer purchase
and repurchase behaviour.
– Predict the future purchase behaviour of
customers and potential customers.
– Maximise future purchase behaviour by
managing the predictors.
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 Customer Value Management –
(2/6)
The process of determining customer value
involves the following steps:
2. Of all the value 3. How well or poorly
dimensions that target are we doing in
1. What do target
customers want, delivering the value
customers value?
which are the that target
most important? customers want?

4. Why are we doing

5. What are the target
poorly or well in
customers likely to
important
value in the future.
value dimensions?

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 Customer Value Management –
(3/6)
• The overarching strategy of CVM is to
deliver better value proposition than the
strongest competitor in each targeted
market segment.
• In a customer value management road
map, there are the following management
phases:
– (1/8) Needs and value-based segmentation,
– (2/8) Value proposition development

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 Customer Value Management –
(4/6)
– (3/8) Product and service delivery
– (4/8) Business operation metrics
– (5/8) Integrated channel strategy
– (6/8) Customer service
– (7/8) Expanding customer relationship and
– (8/8) Migrating customers to new
channels/segments #

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 Customer Value Management –
(5/6) - Benefits
• Importance of CVM - The implementation
of relationship migration strategy for select
accounts have resulted in win-win situation
at Tata Steel as well as for many of its
CVM customers.
• Moving from ‘opinion based’ to ‘data
driven’ decision making. #

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 Customer Value Management –
(6/6) - Benefits
• Changing nature of dialogue with the
customer – CVM has resulted in creation
of knowledge platforms to relate to the
customers across all organisational levels.
• Bringing in accountability in organisational
functions
• Increased responsiveness to customer
needs ##

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