Customer life time value

The concept of relationship marketing and its applications in the field has changed the way organizations think of customers. They strive to acquire and retain the customer for a long time. Customer Lifetime Value (CLV) is defined as the present value of all net payments during the complete life of the customer with the organization. Customer Relationship is considered to be investments and acquiring a customer is like acquiring a new asset, which will generate future revenue.

Applications of CLV:

CLV can be an important input for marketing strategy formulation, especially in the segmentation, selection, retaining customers and in relationship management.

Allocation of resources:

Allocating resources to a particular customer or segment of customer, the organization can be in better position to target the customer, which will be profitable in the long run. The organization can afford more cost of acquisition of customer with higher expected CLV.

EXAMPLE- student as a customer for telecom operator.-special offer etc.,

Customer selection:

CLV   is often used an upper limit on spending to acquire customers.  If the expected cash flows from the relationship with the customers have a present value of Rs.1000, then the company should not spend more than RS.1000 to acquire that customer.

Segmentation:

Customers can be segmented on the basis of calculated CLV and this segmentation can be a very important criterion for various marketing and servicing initiatives. Customer can be offered specific product and price types according to their profiles based on CLV.

Eg: telecom specific tariff plan, banking and insurance sector – specific products and services for high net worth individuals.

Merger and acquisition:

M&A decisions based on the financial statement of the company to be acquired have two shortcomings

1. Financial Statement represent the past performance do not assure any future prospects.

2. Financial statement do not have an insight into the customer base and it’s potential.

Acquisition of the customer base of the company and therefore, strategic decision based on CLV of customer base of the company can be far more accurate as it represents a true picture of the potential scenario of the company.

  

Marketing campaigns:

The CLV matrix can be used in marketing decision to make marketing campaigns focused and effective, especially in situations of limited marketing budgets. The real benefit of the organization when they calculate CLV across customers, segments and marketing campaigns.

Marketing managers need to know the answer to the following question.

·         Which customer acquisition campaign deserve money more or less?

·         What are the demographic and behavioural attributes that define my best customers?

·         How much should the company spend to acquire or retain specific customer or segment?

CLV based loyalty programmers:

Loyalty programs are marketing efforts that reward and therefore, encourage frequent buying and enhance the life of the customer with the organization. Which customer should be rewarded how much? A CLV based reward system in loyalty programs is effective simply because it hurts less when less profitable customers leave the company.

Purchase sequence analysis:

In a multi product company it is not easy to contemplate what product a particular customer will buy next. Valuable piece of information for the company because it can then decide the message and timings of the customer- specific promotional and communication strategy. Companies try to predict what the customer is most likely to buy given his/her past purchases and preferences and then send appropriate marketing communication to customers.