Customer Lifetime Value (CLV)

Muhammad Eamad Zubair

February 04, 2013

A customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so. Mahatma Gandhi

Why Start with a Customer

For a company to be successful, it must :
Understand the customer All customers are not alike! Identify their preferences Customers have different needs! Deliver value - Todays customer is in the drivers seat !

Building Value for Customers

For customers
o Value is the source of long-term prosperity

For salespeople
o Value is sales

ROI vs. CLV

o Return on Investment (ROI) represents a way to measure the immediate result of any sales effort o CLV uses relationship capital to assess the longterm value of the customer

Lifetime Value Approach

When salespeople use the information they have derived and accessed from every contact the customer has with the sales organization, they have the opportunity to improve their relationships with customers and successfully take a lifetime value approach

Use of Data to Maximize CLV

Salespeople can further use this information in decisions to grow, retain, or win customers Information is updated in real time, sometimes after a sales call, other times after other customer contacts

Salespeople can use this information to predict customer behavior

Data are used to profile customers and create customer segments

When lifetime value is important, customer profiles and segments are based on future revenues from customers Data are collected from many sources sales contacts, trade shows, customer e-mails, customer Web site visits Data are assembled, analyzed and stored by others in the sales organization Salespeople use information to better manage their customer relationships and improve customer lifetime value

Feedback

Data collected from customer interactions

20 percent of customers provide 80 percent of the profits

80-20 Rule

Customer Retention with CLV

Customer lifetime value is applicable only if salespeople are focused on developing and maintaining relationships When customers are viewed as assets, CLV concepts enable salespeople to estimate the monetary value of customers

The foundation for profitability and sales sustainability lies in the retention of customers

Customer Lifetime Value (CLV)

Customer lifetime value is the net profit earned from sales to a given customer during the time that customer purchases from the sales organization CLV, as a sales focus, is about how the customer is treated over time Lifetime value is a measure of customer loyalty

Knowing The Customer Lifetime Value

Knowing the CLV helps salespeople:
o Determine how much to spend to acquire a new customer o Determine the level of customer service needed o Determine how much focus should be placed on customer retention o Shift focus from one-time sales to the creation of closer relationships with customers o Retain more customers than their counterparts o Keep their customers for longer periods of time o Develop more profitable customers o Gain referrals from customers with whom solid relationships exist

Building Blocks of Lifetime Customers

Customer Loyalty

Customer Delight Over Time Knowledge of Customer Life Cycles A Relationship Focus

(Schlesinger, Sasser & Heskit 1997)

Not everything that can be counted counts, and not everything that counts can be counted Albert Einstein

Conceptualizing CLV
Calculating a customers lifetime value requires:
o Knowledge of the cost of acquiring the customer o Computations of the stream of revenues forthcoming from the customer o Computations of the recurring costs of delivering service to that customer

CLV (The Approach)

Life Span of Customer Recurring Costs Cumulative Margin Lifetime Value

Net Margin

Recurring Revenues

Acquisition Cost

Customer Defections and Retention

Lost customers are called customer defections Salespeople should have a program of segmenting lost customers by their reasons for defection A customer retention program should be a core activity of sales organizations

Using CLV to Recover Lost Customers

A key to recovering lost customers is for salespeople to make sure the customers are worth having back, and then to have a plan for recovering them
o Not all customers are candidates for a win-back program

Thank You

Backup Slides

The Loyalty Effect

Accountants have developed sophisticated techniques for appraising capital assets and their depreciation; They have learned how to monitor the constantly changing value of work-in-progress; but they have not yet devised a way to track the value of a company's customer inventory.

LTV Analysis Goal:

Determine
Where to put your retention dollars The value of each retention strategy Where to put your acquisition dollars How much to spend on acquisition

What is Life Time Value

NPV of the profit to be realized on the average new customer during a given number of years. Life time value is goodwill To compute it you must be able to track customers from year to year Main use: To evaluate strategy

Acquisition Cost
Marketing + Sales
o Money you spend during the year.

Than
o Marketing+Sales/the number of new customers who actually make purchases from you each year.

The Discount Rate

The profits you receive from your customers come in over several years. Money received in future years is not worth as much as money received today. We must discount it by a certain percentage so we can equate it to the present money. Use the market rate of interest to discount the future revenue
o And include the risk factor

Profits
NPV Profits : Gross Profits / Discount rate Cumulative NPV profits
NPV year 1 + NPV year 2 + NPV year 3

LTV
LTV :
Cumulative NPV profits in each year / original group of customers

Ridgeway Fashions
Assumption: The birthday club will be successful and there will be a 5 % referral rate.

Assumptions
5 percent of her customers will recommend Ridgeway to their friends or relatives. As a result we will have 5 percent more customers in year 2 than we otherwise would have had.

Assumptions

Spending rate, Loyal customers will buy more than new customers. o As customers drop out, those who are left are the more loyal customers. To set the club up in the 1st year will cost $15 per customer. o This includes training of the clerks to ask people to join the club and giving the clerks a commission of $5/customer sign up in addition: Getting the survey data Entering the data, Putting it into the database Creating the birthday club software Writing one letter to each members husband at birthday time. o In years 2 and 3 the costs are set at $3 per year. You will note that she is sending out birthday letters to all club members, even though many have already stopped buying in the store.

Gains from Birthday Club

Year 1 Old LTV New LTV Change With 200,000 Customers $20.00 $17.00 ($3.00) Year 2 $47.59 $58.94 $11.35 Year 3 $60.05 $86.00 $25.95

($600,000) $2,270,690 $5,189,801

Event driven communication:

Dear Mr. Hughes:

Ridgeway Fashions Leesburg, VA 22069

I would like to remind you that your wife Helenas birthday is coming up in two weeks on November 5th. We have the perfect gift for her in stock.
As you know, she loves Liz Claiborne clothing. We have an absolutely beautiful new suit in blue, her favorite color, in a fourteen, her size, priced at $232.00. If you like, I can gift it to you next week, so her birthday. Or, I can Please call me at (703) Sincerely yours, wrap the suit at no extra charge and deliver that you will have it in plenty of time for put it aside so you can come in to pick it up. 754-4470 to let me know which youd prefer.

Robin Baumgartner
Robin Baumgartner, Store Manager