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The life Time value is the net present value of the

future contribution by a customer to the overhead

and the profit of a company.

The customer value calculation does not take placeon an individual customer level but on a segment

level.

The calculations includes the expected income and

expenses for only the first two or three years.

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CLTV : Its meaning and measurement

First phase: Manual selection of criteria. Eg. postcode

Second phase: Inclusion of socio-economic/ geo-demographic data.

Third phase: Data mining / propensity scoring.

Fourth phase: LTV based selection.Fifth phase (current): Yield-optimized, multi-channel/ product

segmentation.

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Customer life time value creation consists of a

process of ad hoc segmentation and data analysisfor data base marketing, a process of automation

of decisions against customer requests, targeted

retention activities and decisions to ensure

retention effort is aligned to customer life time

value, identification of customer categories for

cross selling and up selling of financial services,

development of service and product portfoliosaligned to the concept of customer life time value,

alignment of customers to appropriate channels

by customer life time value.

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LTV = Total revenues- (Fixed costs + variable costs)

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Customer Lifetime value CLV

It is the basis from which an ongoingprogramme of customer communication and

support can be planned, evaluated and

constantly updated.

It improves customer loyalty and retention, the

ability to cross and upsell and, through all of

this, directly improves bottom line profits.

It depicts firms cost of acquiring, serving andretaining its customers.

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A share broking firm operates for 225 days a year. A customer

with a total investment portfolio of Rs 5,00,000 churns hisportfolio every 15 working days.

The total number of times he churns his portfolio is = 225/15

= 15

The total business he conducts with the firm = 15 x

(as churning includes both buying and selling) Rs 5,00,000 x2

Commission the firms gets @ 5% = Rs 2,22,500x5

If he stays with the firm for just five years his value

for the firms = Rs.11,12,500If he brings in one more customer of half of his value = Rs.5,56,250

The revenue the organization is going to get from him = Rs.16,68,750

The total revenue at stake for the organization = Rs. 16,68,750

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Three models for LTV

RFM Model

Share-of-Wallet Model

Past Customer Value Model

Value of CLV is based on the actual experience

by the customer in the marketplace.

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Amity Business SchoolRFM model Bult and Wansbeek (1995), where RFM is stand

for Recency, Frequency, and Monetary.

CLV = R x F X M

R = Recency of how long it has been since acustomer last placed an order with the

company.

F = Frequency of how often a customer ordersfrom the company in a certain defined period.

M = Monetary Value of amount that a customer

spends on an average transaction.

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Share-of-Wallet (SOW) model

Share-of-Wallet (SOW) model is the secondmodel that can be used for estimating the CLV

of each customer.

Kumar and Reinartz (2005) defined SOW as

the proportion of category value accountedfor by a focal brand or a focal firm within its

base of buyers.

SOW is defined as the proportion of categoryvalue accounted for by a focal brand or a

focal firm for a buyer from all brands that the

buyer purchases in that category.

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It indicates the degree to which a customer meets his

needs in the category with a focal brand or firm. It is computed by dividing the value of sales (S) of the

focal firm (j) to a buyer in a category by the size-of-wallet

of the same customer in a time period. SOW is measured

in percentage.

S = sales to the focal customer j = firm

summation of the value of sales made by all the

J firms that sell a category of products to a buyer.

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Past performance of the customer (transaction or buying)indicates their future level of profitability and an extrapolationof the results of past transactions is a measure of customersvalue in the future.

The value of a customer is determined based on the totalcontribution (towards profits) provided by the customer in thepast.

The contributions from past transactions of every customer are

adjusted for the time value of money and the cumulativecontribution till the present period of the past customer value ofcustomer.

Past customer value model (PCV model)

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PCV can compute using the following formula:

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Model is lacking of detecting the location of

a single customer in the geographical

location.

Not able to presenting the CLV of customer

in the market place, as well as other CLV

model.

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Issues in calculating CLV

Lack of data

Lost customers

Newer company Choosing a formula

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Fed Ex analyzed the returns on its business for about 30

large customers that generate about 10% of its total

volume.

It found that certain customers including some who

required lots of residential deliveries were not bringingin as much revenue as they had promised when they first

negotiated discounted rates.

Fedex demanded that some customers pay higher rates.

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Thomas Cook

Thomas Cook divided its customers into:

As (those bringing in $750 or more in annual revenues)

Bs (those bringing in $250-$749 or more in annual

revenues)

Cs (those bringing in less than $250 or more in annual

revenues)

80% of the customers were in C category.

When C customers demand time consuming services (eg

asking an agent to research a trip they are not sure they

will take) they are asked for a $25 deposit).

This differentiation between the best and the worst

customers has resulted in 20% growth in the companys A

& B clients.

B i f f l CLV

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Basis for successful CLV

Connect with overall business strategy.

Linkage with the loyalty that the company

seeks to bring in. Referrals must be the part of the CLV.

Constant rate of retention and discount not

feasible.