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Customer Lifetime Value. Fall 2013 Dr. Hettche. Lecture Overview. Review Two Essential Metrics leading to CLTV SPSS CLTV or LTV and Value-based Marketing. Not all customers are created equal. High value customer . . . . . . . . Low value customer. 2 nd Example.

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customer lifetime value

Customer Lifetime Value

Fall 2013

Dr. Hettche

lecture overview
Lecture Overview
  • Review
  • Two Essential Metrics leading to CLTV
  • SPSS
  • CLTV or LTV and Value-based Marketing
slide3
Not all customers are created equal

High value customer

.

.

.

.

.

.

.

.

Low value customer

2 nd example
2nd Example
  • Large B2B company
  • 93% of the company’s revenues are determined by 8% of its customers
slide5
Demand Generation Marketing

Vs.

Value-based Marketing

you win 1million
You Win 1Million $$$$

$520,000 Now.. . . . . . . . or

100,000 for 10 years

you win 1million1
You Win 1Million $$$$

$520,000 Now.. . . . . . . . or

100,000 for 10 years

r = 10%

$614,457

  • Present Value

r = rate of return

slide10
r =

Discount Rate

Cost of Capital

Hurdle Rate

5%

10%

12%

net present value
Net Present Value

C = cost of marketing

B = cash benefit

r = rate of return

another definition
Another Definition

Also known as LTV

The net present value of the profits linked to a specific customer once the customer has been acquired, after subtracting incremental costs associated with marketing, selling, production and servicing over the customer’s lifetime (106).

another definition1
Another Definition

LTV (definition)

The net present value of the profits linked to a specific customer once the customer has been acquired, after subtracting incremental costs associated with marketing, selling, production and servicing over the customer’s lifetime (106).

simple model
Simple Model

AC = acquisition costs

M = margin

C = cost of marketing

p = probability C with churn

N = years (or time pd)

r = discount rate

cltv or ltv
CLTV or LTV
  • Lifetime value is a measure

for the individual *not the

group

time horizon
TIME Horizon
  • Three Years
  • Five Years
  • Sector/Category Specific
  • Aim low
acquisition cost
Acquisition Cost
  • Sales commissions
  • Advertising
  • List Rental
  • Discounts
  • Sales
tweaking the basic formula 3 classes of ltv models
Tweaking the basic formula3 classes of LTV Models
  • Simple Retention Model
    • Financial services, [email protected], magazine subscriptions, pharmaceutical drugs
    • Hazards Model (Weibull distribution)
  • Migration Model
    • Retailing, catalogs, and consumer packaged goods
    • Recency states (as well as frequency states)
  • LTV Model with unobserved customer attrition
value based marketing
3 take aways:

Retain and Cross-sell/Up-sell to HIGH CLTVs

Migrate medium-value CLTVs to HIGH CLTVs

Reduce your cost of NEGATIVE CLTVs

Value –based Marketing
3 types of bad
3 Types of BAD

Best Buy: Returns, open box discount, and restocking fees

Continental Airlines: bereavement fares

Intuit Quickbooks: 800 service calls in one year

$2.50 to $7.50 per service call

$6 per transaction (in person teller)

25 cents for ATM

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