CUSTOMER LIFETIME CONCEPT

Learning Objectives
After going through this chapter, the students will
be able to:
Appreciate the importance of the concept of Marketing
Orientation for building mutual reward system for the
customers and the organizations
Figure out the contribution of the concept of value
creation for achieving customer focus
Understand different phases of Customer Life Cycle
and its implication in selecting appropriate marketing
strategies
Comprehend the concepts of Customer Life-Time Value
(CLV) and its strategic importance
Identify the methods of calculating CLV and the ways to
improve it
 Introduction
For increasing the effectiveness of Marketing
Programs, it is important to know whom to
communicate, when to communicate, what to
communicate, how to communicate and properly time
all the interactions with the customer.

The answer to all these questions can be found by

properly knowing the customer life cycle.

The knowledge of Customer Life Time Value enables

the organization to focus the strategies to specific
segment of the customer and create the balance
between efforts and returns.
 Marketing Orientation

A Production oriented approach

A Selling oriented approach

A Marketing oriented approach

Mutual Reward System
Value Creation
 Value Creation
Airtel
Started as voice-communication device
Additional benefits and services
Internet connectivity
Mobile banking
Online games
Mobile commerce
Many value-added services(VAS)
Value Creation Strategies
 CUSTOMER LIFETIME CONCEPT
Customer Life Cycle (CLC)
Journey of the customer from getting
attention to becoming a customer and finally
being retained and associated for a long time
with an organization
Organizations look forward not only to selling,
but try to manage each and every interaction
and touch point with the objective of
customer retention.
 CUSTOMER LIFETIME CONCEPT
Customer Life Cycle (CLC)
Four phases
Reach
Acquisition
Conversion
Retention
 CUSTOMER LIFETIME CONCEPT
Reach
Process of getting attention of prospective
customers
Promotional activities and multiple touch
points
First stage of interaction
 CUSTOMER LIFETIME CONCEPT
Acquisition
How effectively organization has got this
attention
Filing up online for
Watching demo
 CUSTOMER LIFETIME CONCEPT
Conversion
Customer
When exchange takes place
Process of acquired customers to actual
customers
Most difficult step
 CUSTOMER LIFETIME CONCEPT
Retention
Maintain relation
Loyal customer requires continued customer
satisfaction
Customer Life Cycle (CLC)
CLC Marketing
 CUSTOMER LIFETIME CONCEPT
Healthy choice
Delicious frozen food that fuels a healthy
lifestyle
Owned by ConAgra Foods
 CUSTOMER LIFETIME CONCEPT
Healthy Choice
How healthy choice increases reach using
Facebook
To increase the number of people connected
to the companys Facebook page
Facebook peer-to-peer communications can
extend a campaigns reach to beyond initial
target audience
 CUSTOMER LIFETIME CONCEPT
Healthy Choice
Targeting allows companies to reach existing
and potential customers
Facebook can be an effective platform for a
coupon campaign to support a new product
launch
 Customer Lifetime Value (CLV)
Management wants to know the financial worth of this
relationship to the organization so that the decisions
regarding the level of efforts to acquire and retain the
customers can be made.

The ways to manage the relationship with the

customers and at the same time distinguish between
a profitable customer and a loss making customer.

The replacement of transaction marketing by

relationship marketing has led the manager to find
out the new way of finding the economic value of the
customer considering both the relationship benefits
and accounting profit from the customer.
 CLV Defined
CLV is defined as the present value of
all net payments during the complete
life of the customer with the
organization.

To evaluate CLV, all future revenues

and costs must be assessed. Simply
putting, CLV is the present value of all
future purchases by the customer
minus the costs to be incurred by the
company.
 Customer Lifetime Value (CLV)
FEDERAL EXPRESS
A customer of Federal Express
20 person Office
Spends $1500 per month with Federal Express
Assume 10-year average lifetime for a
customer.
Value of one customer to Federal Express is
1500*12*10 = $1,80,000

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 Customer Lifetime Value (CLV)
FEDERAL EXPRESS CUSTOMERS
If this happy creates at least one more customer via
word of mouth.
Total amount is 1,80,000*2=$3,60,000
Value of this companys business for Federal Express
was about $3,60,000
Federal Express handles 40 customers each day.
Total business handled = 3,60,000*40=$14400000

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 Customer Lifetime Value (CLV)
FEDERAL EXPRESS
If Federal Express retains 40 customers for 10
years period then total business accrued is
$14,40,0000.

Relationship Marketing attempts this by

retaining profitable customers.

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 Customer Lifetime Value (CLV)
Lifetime value
ITC Classic Cigarette
An average consumer spends Rs. 2000/ month
Yearly Rs. 24000/-
If he stays customer for 30 years
Likely revenue
24000 x 30 = 7.2 lacs per customer
Lifetime value of Customer is Rs. 7.2 lacs

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 Customer Lifetime Value (CLV)
Classic has 2 lac customers
Total potential revenue earned is
Rs. 7.2 lacs x 2 lacs = 14400 crores
If Classic customers stay loyal, ITC will earn a
potential sale of Rs 14400 crores
Retaining and maintaining loyalty critical.
Plus profits from references.

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 Customer Lifetime Value (CLV)
Importance of lifetime value
Importance of retaining customers
Loss of potential sales and profits when
customers defect
Strategic importance of retaining customers.
If you retain customers for the entire lifetime,
you have done an excellent job.

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 Applications of CLV
Allocation of resources
Customer Selection
Segmentation
Merger & Acquisitions
Customer Equity
Marketing Campaigns
CLV Based Loyalty Programs
Purchase Sequence Analysis
 Calculating CLV
The CLTV of a customer is calculated
based on the following inputs:

The cost of acquiring the customer

Periodic cost of providing
service/product
Retention rate of churn rate of the
customer
Rate of discounting
Computing CLTV
 Calculating CLV

CLV

= Net Present Value of all cash flows

from the customer

= Expected Cumulative Margins

Acquisition Cost (AC)
 CUSTOMER LIFETIME CONCEPT
How to Improve CLV?
Small increase in retention rate
Big increase in CLV
Strategies to increase customer loyalty
Four segments of customers
Low current value and low potential value
customers
 CUSTOMER LIFETIME CONCEPT
Four segments of customers
Low current value and low potential value
customers
Low current value and high potential value
customers
High current value and low potential value
customers
High current value and high potential value
customers
How to Improve CLV?
 CUSTOMER LIFETIME CONCEPT
Social customers
High referral value
Refer and recommend products to others
Active on social networking sites
Ambassadors of products
Word of mouth
 CUSTOMER LIFETIME CONCEPT
Fertile customers
Customers who are likely to talk more about
products to others
Large indirect impact
 CUSTOMER LIFETIME CONCEPT
Customer Referral Value(CRV)
Ability of one customer to generate vale by
reference and recommendations from the
other customers
Task is to identify customers with high CRV.
 Recap
The mutual reward system, which results into a
win-win situation for both- customer and
organization, is centred on customers needs and
wants.

The concept of value creation for achieving

customer focus, which results in retaining the
customers and therefore, maximizing their
lifetime value, has been discussed. Product
Evolution and creating right environment in the
organization have been discussed as the
strategies for value creation.
 Recap (Contd.)
The Five Key-Commitments Model serves as a
framework for developing commitments towards Self,
People, Task, organization and Customers, which
creates the capability of the organization for
delivering the superior value to the customers and
generating profits for the organization.

The purpose of CLC is to define and understand the

different phases through which a customer progresses
while interacting with the organization.

Customer Lifetime Value (CLV), which is the NPV of all

net payments during the entire life of the customer, is
gaining acceptance as a metric used to acquire,
convert and retain right kind of customers.