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 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download