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Cust Lifetime Value

Apr 10, 2018

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    CUSTOMER

    LIFE TIME

    VALUE

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    THE ULTIMATE GOAL FOR ANY BUSINESS

    IS TO

    DEVELOP HIGHLY COMMITTED

    CUSTOMERS WHO,

    NOT ONLY MAKE REPEAT PURCHASES ,AND,

    GENERATE CONTINUOS REVENUE

    STREAMS,

    BUT ALSO REQUIRE MINIMUM

    MAINTENANCE ALONG THE WAY.

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    Some customers may not bring profits in their initial purchases, butthe margins from their future expected purchases certainly could

    be quite assuring ones.

    (Specially where companies upgrade their customers with

    new types of prodcts/categories from the existing ones)

    Firms therefore need to track initial customers

    acquisition costs and compare them to the profits to begenerated over the customers expected relationship

    with the company.

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    AMULAMUL BUTTER OLD AD

    AMUL 2

    AMUL ICE CREAM

    AMUL CHOCOLATE

    AMUL UMBRELLA BRAND.

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    THESE CALCULATIONS HELP MARKETERS TO

    1. DECIDE WHICH CUSTOMERS TO GO AFTER,

    2. HOW TO CHANGE THE PROMOTIONAL MIX BASED ONPAST AND PRESENT TRANSACTIONS,

    3. AND IF NECESSARY, WHICH CUSTOMERS TODISCONTINUE.

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    IN ORDER TO DETERMINE CUSTOMER PROFITABILITY,

    ONE NEEDS TO HAVE CLEAR SENSE OF CUSTOMERCHARACTERISTICS.

    HISTORICAL DATA SUGGESTS HOW REMUNERATIVEWERE PROMOTIONS/COMMUNICATIONS FOR

    PARTICULAR PRODUCT/S. BASED ON THIS, COSTS FOR

    FUTURE PROMOTIONS CAN BE DECIDED.

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    CLTV or customer lifetime value ~

    measures the value of a customer or group ofcustomers to a company;

    helps estimate the cost of acquiring a customer &

    also calculates the NPV (Net Present Value) of thatcustomers business during his or her economic life.

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    This includes advertisements, special discount coupons or

    giving out of free samples.

    How much it costs the company to reach each potentialcustomer

    What percentage of customers reached will make an initial

    purchase.

    If there are additional costs (such as a rebate) that only

    apply to actual customers, those are also calculated.

    This provides a total cost per acquired customer

    The models assume that customer acquisition

    requires a spending program.

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    LIFETIME CUSTOMR VALUECALCULATOR

    ASSUMPTIONS

    CLTV new.xls

    http://cltv%20new.xls/http://cltv%20new.xls/
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    BASIC MODEL CALCULATIONS

    lifetimevalue.xls

    http://lifetimevalue.xls/http://lifetimevalue.xls/
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    The customer value calculation is an infinite function

    At each potential repurchase period, the marketeer must estimate

    how many existing customers will continue to buy, a percentage

    known as Retention Rate.

    One needs to adjust for price inflation;In the simple model the customer is considered to have an infinite

    economic life, and for this, retention rates have to be extremely

    high.

    (Even at 80% retention, a customer is almost 90% used up' after

    just ten years.)

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    COMPLEX MODEL ASSUMPTIONS

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    COMPLEX MODEL CALCULATIONS

    lifetimevalue.xls

    http://lifetimevalue.xls/http://lifetimevalue.xls/
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    THE CATALOG RETAILER:

    A direct catalog retailer is wanting to know whether to go ahead with

    attracting new customers using names purchased from a list or byrandomly sending out catalogs.

    Cost of sending a catalog (including production & mailing) = $0.5

    Co anticipates that by random mailing, the purchase rate = 1%

    Response rate from brokers list = 4%

    (By analysing buyer behaviour & demographics of current customers)

    Cost of acquiring each name from list = $ 0.2

    The direct retailer now wishes to calculate the acquisition costsassociated with each source of potential customers.

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    The retailer now requires response rate and cost of sending a

    catalog to each prospect.

    A response rate of 1% means that of 100 catalogs sent, only

    one recipient is expected to respond. And a response rate of

    4% would mean, of the 25 catalogs sent, one recipient is

    expected to respond with a purchase.

    Cost of acquiring a customer therefore is:

    Acquisition cost=

    (No of catalogs needed to get 1 cust) *(Cost of sending a cat.) =

    Cost of sending a catalog / response rate

    For random mailing: 0.5/0.01 = $ 50

    Cost from rented list: 0.7/0.04 = $17.5

    Even if the cost of promotion is high, the rate of response being

    comparatively higher, cost of acquisition of a customer reduces drastically

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    STRATEGIC IMPLICATIONS OF CUTOMER LIFE TIMEVALUE ANALYSIS

    1. FIRING CUSTOMERS BECOMES EASY(By keeping high price

    on least profitableproducts)

    2. REWARDING CUSTOMERS: investing more in loyal customers

    3. IDENTIFYING CROSS SELLING OPPORTUNITIES: Additional orrelated products can be offered individually or in bouquet format by

    knwoing their likes and dislikes and purchase patterns. Therefore

    also signalling line extensions/expansions.