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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/8/8/2019 Cust Lifetime Value
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BASIC MODEL CALCULATIONS
lifetimevalue.xls
http://lifetimevalue.xls/http://lifetimevalue.xls/8/8/2019 Cust Lifetime Value
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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/8/8/2019 Cust Lifetime Value
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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.