Customer Lifetime Value

& Acquisition
Management for retaining
and development of
customers

Module 2: session 5, 31st Nov Dr. Deepak Halan

 Philip Kotler - The Importance of Service and Value

Philip Kotler argues organisations need to give ‘use value’ as well as

‘purchase value’.

An organisation’s value is not just what’s on the balance sheet but

also comes from the value of the employees, customers, networks
and the brand equity.

https://youtu.be/rEhd0uCaBWg
 What is
Customer LIFETIME value all
about??
 You may start with a free trial. As soon as the customer makes the first
purchase of one of your products or services, the customer lifetime starts
officially. 
 
It lasts via several renewals and it ends at the moment the customer
churns from your solution. 
 For example, let’s say a customer’s CLV is $80K. If you need to spend around $15K per year to service
this customer and acquiring a customer like this costs you $20K, how long do you want to keep this
customer? Of course, you don’t want to keep them for more than four years otherwise you will be breaking
even, and you start to lose money.

around 20% of your customers on average are “brand evangelists”. People who refer new customers, frequently upgrade etc.
Each segment has a different CLV and Cost-Per-Aquisition
Factors responsible for growing interest in
CLV…
 Increasing pressure in companies to make
marketing accountable

 Financial metrics are not always relevant

 Improvements in IT have made it easy for

firms to collect enormous amount of
customer transaction data
 Which brands – especially
service ones have you been loyal
to on a very long term basis and
what have they done right to earn
this??
CLV

 It is defined as the difference between what

it costs to acquire, service and retain a
customer and the revenue generated from
that customer over the customer lifecycle
 Lifetime Value of Customers

 The lifetime value calculation looks at customers

from the point of view of their lifetime revenue or
profit contribution to a firm.

 The lifetime value of a customer depends on:

 The length of an average ‘lifetime’

 The average revenues generated per relevant time
period over the lifetime
 Sales of additional products and services during that
time, and
 Referrals generated by the customer over the lifetime
Do you recall segmentation??
Target Market Selection Process
Step 4: Evaluate Relevant Market Segments

 Sales Estimates
 Market potential
 Company sales potential
 Measuring Sales Potential
 Breakdown approach: top-down analysis
 Build-up approach: bottom-up analysis
 Competitive Assessment
 Who, how many, how large, and how strong?
 Cost Estimates
 The expense of developing a marketing mix
 Costs of reaching segment relative to competitors’ costs

Data mining---CLV based selection

So from segment centric mktg TO Cust centric mktg
 Cost of acquisition and CLV
Location Amount Number of Customer Acquisition Cost
spent customers (CAC) Assume that a firm
decides to go acquire
Mall 100$ 100 1$ customers at three
different places a mall, a
Theatre 150$ 50 3$
theatre and a
Playground 250$ 25 10$ playground.

This scenario says that the mall is an apt place, since the CAC is least over there. Now consider the Customer
lifetime value (CLV) and the corresponding profits also.

Location Amount Number CAC Customer Reven Profit

Spent of Lifetime Value ue s
customer CLV) So, now when we also take the
s
Customer Lifetime value into
Mall 100$ 100 1$ 10$ 1000$ 900$ consideration, we observe that the
Theatre 150$ 50 3$ 30$ 1500$ 1350$ Playground is the best place to
Playgrou 250$ 25 10$ 100$ 2500$ 2250$ acquire customers.
nd

The CLV:CAC ratio is a powerful metric to define the Return on Investment (ROI)
CLV vs Cost of Acquisition in Ecommerce

 You cannot acquire a customer for life.

 In ecommerce, loyalty is a thing of the past. Many struggle

to find the right balance between customer acquisition &
retention.

 Over a longer term, e-tailers might want to discontinue the

channels that have a consistently higher CoA

 But apart from CoA, CLV also needs to be considered

So how can the Amazons & Flipkarts increase CLV
 Loyalty programs to create stickiness and drive repeat purchases.

 Do not charge for product returns. It does put in a load on the operations side but brings in
the baggage of good experience and more future purchases.

 Interactive tools - for eg Size Fittings for categories like footwear, apparels, etc. is one of
the major reasons for product returns.

 Ecommerce is all about providing easy access to products and services from the comfort of
the home. Customers expect an excellent 24*7 support to aid them for their queries and
complaints.

 Wider range of custom delivery options is required. Ecommerce players provide different
delivery options that allow you to get the product delivered even in 1 day. Other possibilities
can be incorporated like the option for nominating friends, etc. to be delivered the product
in the absence of the customer.

 Being in touch - Sending post purchase emails and festival wishes can be a way to
continue to have relevant mind space.
An example from Banking
Application of CLV…

 Resource Allocation
 Segmentation, selection & retention of
customers
 Since it rep financial aspect of RoR…M&As
 Designing marketing campaigns
 Designing loyalty pgms
 Customer Equity (vs Brand Equity)
 How is
Customer lifetime value
calculated??
 Big/small ticket
Movies/dining vs flying
CLV Calculation eg
The most basic way to determine CLV is to add up the revenue earned from a customer
(annual revenue multiplied by the average customer lifespan) minus the initial cost of
acquiring them.

(Annual revenue per customer * Customer relationship in years) – Customer acquisition

cost

Let’s say a SaaS company generates on an avg $3,000 each year per customer
with an average customer lifetime of 10 years and a

Avg CAC of $5,000 for each customer.

The company could calculate CLV like this:

($3,000 * 10) - $5,000 = $25,000

The simple approach can be used if a customer’s annual profit contribution remains
somewhat consistent. For example, if you run on a subscription-based model with only
one or two tiers, then each your customers can be expected to provide a relatively stable
source of revenue.
CLV Calculation eg
Thank You