Customer lifetime value (CLV) - Pennsylvania State University
[Pages:59]Customer lifetime value (CLV)
Customer lifetime value
Outline
The concept of customer lifetime value (CLV)
Comparison of CLV with related metrics Analyzing CLV Extensions of CLV analysis Drivers of CLV Uses of CLV metrics
Customer lifetime value
Learning goals
Understand what CLV means and why it is important to marketers
Be familiar with different methods of assessing the value of customers and their relative strengths and weaknesses
Know how to calculate the lifetime value of customers depending on when they pay and when they leave
Know how to calculate the CLV of different customer segments
Use CLV information for additional analyses
Customer lifetime value
Customer lifetime value (CLV)
the discounted cumulative cash flows that a customer brings to the firm over the entire duration of the relationship with the company (Kumar 2006);
takes into account both revenues and costs and emphasizes relationships, not transactions;
allows firms to assess the true worth of customers and to target their marketing efforts to the most profitable customers;
Customer lifetime value
Comparison of CLV with other metrics
RFM method:
Recency: time since last purchase Frequency: number of purchases within a given time
period; Monetary value: average purchase amount per
transaction;
How RFM is used:
Assign weights to R, F, and M and then calculate the value of each customer; rank customers by value;
Only available for historical customer data; Sensitive to the specification of the weights used;
Customer lifetime value
Example RFM analysis
Purchase R (months R points Weight Weighted F F points Weight Weighted M
M Weight Weighted RFM
number since last
of R R points
of F F points
points of M M points score
purchase)
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
John
1
2
3
Jordan 1
Judy
1
2
3
4
2
20 0.5
10
1
3
0.2
0.6
40
4
0.3
1.2
24.9
4
10 0.5
5
1
3
0.2
0.6
120 12
0.3
3.6
9
3
0.5
1.5
1
3
0.2
0.6
60
6
0.3
1.8
6
5
0.5
2.5
2
6
0.2
1.2
400 25
0.3
7.5
11.2
2
20 0.5
10
1
3
0.2
0.6
90
9
0.3
2.7
30.4
4
10 0.5
5
1
3
0.2
0.6
70
7
0.3
2.1
6
5
0.5
2.5
2
6
0.2
1.2
80
8
0.3
2.4
9
3
0.5
1.5
1
3
0.2
0.6
40
4
0.3
1.2
R points: =IF(C2 ................
................
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