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Understanding Customer Lifetime Value
©Copyright 2013. CTS Service Solutions. All Rights Reserved.
By Adam Toporek
July 22, 2013
On November 29, 2011, we posted
Understanding Customer Lifetime
Value: A Non-Geek’s Guide, an
extensive look at the non-academic
approach to Customer Lifetime
Value.
This SlideShare presentation breaks
the CLV concept down step-by-step.
What Is
Customer
Lifetime Value
and Why Is It
Important?
Customer Lifetime Value (CLV)
attempts to determine the
economic value customers bring
over their “lifetime” with the
business.
At the heart of understanding CLV
lies the recognition that a customer
does not represent a single
transaction but a relationship that is
far more valuable than any one-
time exchange.
Understanding CLV is incredibly
important for customer service
professionals and for
businesses of all types. Why?
Because if you don’t know what
a client is worth, you don’t
know what you should spend to
get one or what you should
spend to keep one.
Why a Non-
Geek Guide to
Customer
Lifetime Value?
Often, statistically
sound approaches
are not feasible.
Sometimes the
back of the napkin
is all we have.
The Customer Lifetime Value calculation can
be an extremely complex undertaking.
Breaking Down CLV
Let’s begin by taking a look at the
major components of Customer
Lifetime Value…
Calculating The
Profit of an
Average
Transaction
Unit Contribution Margin
The tendency when
thinking about the lifetime
value of a customer is to
focus on the revenue the
customer brings in over
their lifetime.
However, focusing on
revenue will almost always
overstate the value of the
customer.
Marginal Profit
The more accurate way to
measure is to focus on
what is known as the Unit
Contribution
Margin, which we’ll call
marginal profit for short.
customersthatstick.com
Take Starbucks for Example…
If a customer buys a $5.00
latte, that transaction has
costs associated with it.
The milk, the cup, the
coffee, the lid, and the
flavoring all add to a
variable cost that is
incurred for that latte
transaction.
customersthatstick.com
Marginal Profit of a Latte
$5.00 latte
-$0.50 cup
-$0.50 lid
-$0.25 milk
-$0.25 flavoring
$3.50 Marginal Profit
Marginal Profit – Step 2
The next step is figuring
out the average of all of
the company’s
transactions.
You want to figure out the
number of each different
type of transaction and
calculate an average profit
profile per customer.
Average
Labor might not always be a variable cost.
If your company’s labor is constant and
does not depend on the number of units
sold, labor may not be included in the
calculation.
Note…
What is Your
Customer’s
Lifetime?
(Customer
Retention Rate)
Retention Rate (RR)
We begin by calculating the
retention rate.
Take the number of
customers from last year who
are still customers this year.
i.e. if you had 100 customers
last year and 45 are still
doing business with you this
year, then your retention rate
is 45%.
Current
Retained
Customers
÷
Customers
from Last
Year
Customer Lifetime
Using your retention
rate of 45%...
CL = 1/(1-.45) = 1.8
Your Customer
lifetime is 1.8
years
Customer
Lifetime (CL)
=
1÷(1-RR)
The Last Piece
Is Your
Discount Rate…
Discount rate is the interest
rate you borrow at in your
business.
The concept is based on the
time value of money, the
premise that a dollar today
is worth more than a dollar
tomorrow.
The longer you calculate your customer
lifetime to be, the more important the
discount rate becomes and the more
inaccurate your model becomes when
you ignore the rate.
Just Remember…
Now That You
Have the Parts:
Understanding
Customer
Segmentation
At the heart of customer segmentation is
the belief that all customers are not
created equal and that understanding
the differences among customer
segments is key to effectively acquiring
and retaining customers.
How would I group my customers if I
wanted to customize my
marketing, retention, or product
offerings?
Ask Yourself One Simple Question:
Where To Begin?
Break down the segments based
on differentiated products or
services.
For example, if your department
provides distinctly different
services to both small businesses
and individuals, you may consider
calculating a Customer Lifetime
Value for each segment.
If your business does
not have obvious
divisions, you should
consider what factors
have the most impact
on customer buying
characteristics – or
segment on behavior
itself.
customersthatstick.com
Start with your gut…
If you know your business, you probably
have an innate sense of what types of
customers act what way.
Try to fill in the blanks in this statement…
Customers who _____
tend to _____.
Using CLV
Technically, the calculation of
Customer Lifetime Value should
include acquisition and retention
costs.
What Are Your
Customer
Acquisition
Costs?
customersthatstick.com
Take your marketing
expenditures for a
period and divide by
the number of new
clients in the same
period.
What Does It Cost to Get a Customer
In the Door?
Try to find a period that is relevant for you and
your business based on how you approach your
marketing and make sure to account for the lag
time between marketing and acquisition.
What Are Your
Retention
Costs?
• Perks for longevity
• Discounts for existing customers
• Freebies for certain buying behaviors
Start with Obvious Hard Costs
PS: Make sure to average the cost out across the
entire customer base.
If you send your
sales staff to a
customer service
seminar, is that a
retention cost?
Think About Your Soft Costs
If you redesign the help section on your web
site, is that a retention cost?
One question that should help determine if a soft
cost belongs in the retention “bucket” is this:
What is our primary
reason for incurring
these costs?
If customer
satisfaction, retentio
n or any similar
customer service-
based sentiment is
the primary reason, it
is probably safe to
consider the
expenditure a
retention cost.
If you are segmenting your customer base, you
will need to apply these calculations for each
segment, not the customer base as a whole.
A Final Note on Acquisition and Retention
Tying It All Together
Now that you have your CLV and a
grasp on your marketing and
retention costs, it is time to put the
two together.
An Example…
Customer Lifetime Value and Acquisition
customersthatstick.com
The owners of a golf pro shop determine that
most of their customers come from two zip
codes, one to the east and one to the west. The
owners decide to calculate the CLV separately
for each zip code.
They discover that the CLV for the eastern
customers is 4 times the CLV for the western
customers.
They also find that the eastern
zip code is 30% of their
customer base but 80% of their
profit.
The western zip code represents
70% of their customer base and
20% of their profit.
The pro shop owners
have been spending their
marketing dollars evenly
between east and west.
Calculating the CLV for
each segment made it
obvious that their
marketing dollars were
not being allocated
effectively.
Final Thoughts
Computing Customer Lifetime Value can
be one of the most eye-opening and
rewarding exercises in business.
Knowing your CLV can help you truly
understand the value and effectiveness of
your marketing and retention
expenditures.
Customer
Lifetime Value
Calculator and
Resources
We hope that you can derive true value from a
back of the napkin approach to CLV, but you
should realize the limitations of using such a
non-scientific approach.
Each business is different, but there might be a
time where you feel the need to get your geek
on. If so, here are
some more resources
dedicated to CLV.
customersthatstick.com
1. An infographic on calculating Lifetime Value
from Kissmetrics
2. Modeling Customer Lifetime Value from
Gupta et al (An academic tract on the
subject. PDF link.)
3. Customer Lifetime Value calculator from
Harvard Business Review Publishing
4. Customer Lifetime Value overview from
Wikipedia
(i.e. Getting Your Geek On)
Want more on Customer Service and the Customer
Experience? Download your copy of our FREE eBook,
7 Secret Customer Service Techniques Every Expert
Knows.
Click the book below!
FREE!
In addition to your FREE eBook, you will receive our
eNewsletter, The Customer Conversation including…
Exclusive Customer Service Content not published anywhere else
Our popular Monday Motivation series
Customer Service tools and resources
eBook
Click the
Tab to Get
Your
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Also Connect with Us on Social Media!
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Understand Your Customers' Lifetime Value

  • 2. ©Copyright 2013. CTS Service Solutions. All Rights Reserved. By Adam Toporek July 22, 2013 On November 29, 2011, we posted Understanding Customer Lifetime Value: A Non-Geek’s Guide, an extensive look at the non-academic approach to Customer Lifetime Value. This SlideShare presentation breaks the CLV concept down step-by-step.
  • 3. What Is Customer Lifetime Value and Why Is It Important?
  • 4. Customer Lifetime Value (CLV) attempts to determine the economic value customers bring over their “lifetime” with the business.
  • 5. At the heart of understanding CLV lies the recognition that a customer does not represent a single transaction but a relationship that is far more valuable than any one- time exchange.
  • 6. Understanding CLV is incredibly important for customer service professionals and for businesses of all types. Why? Because if you don’t know what a client is worth, you don’t know what you should spend to get one or what you should spend to keep one.
  • 7. Why a Non- Geek Guide to Customer Lifetime Value?
  • 8. Often, statistically sound approaches are not feasible. Sometimes the back of the napkin is all we have. The Customer Lifetime Value calculation can be an extremely complex undertaking.
  • 9. Breaking Down CLV Let’s begin by taking a look at the major components of Customer Lifetime Value…
  • 10. Calculating The Profit of an Average Transaction
  • 11. Unit Contribution Margin The tendency when thinking about the lifetime value of a customer is to focus on the revenue the customer brings in over their lifetime. However, focusing on revenue will almost always overstate the value of the customer.
  • 12. Marginal Profit The more accurate way to measure is to focus on what is known as the Unit Contribution Margin, which we’ll call marginal profit for short. customersthatstick.com
  • 13. Take Starbucks for Example… If a customer buys a $5.00 latte, that transaction has costs associated with it. The milk, the cup, the coffee, the lid, and the flavoring all add to a variable cost that is incurred for that latte transaction. customersthatstick.com
  • 14. Marginal Profit of a Latte $5.00 latte -$0.50 cup -$0.50 lid -$0.25 milk -$0.25 flavoring $3.50 Marginal Profit
  • 15. Marginal Profit – Step 2 The next step is figuring out the average of all of the company’s transactions. You want to figure out the number of each different type of transaction and calculate an average profit profile per customer. Average
  • 16. Labor might not always be a variable cost. If your company’s labor is constant and does not depend on the number of units sold, labor may not be included in the calculation. Note…
  • 18. Retention Rate (RR) We begin by calculating the retention rate. Take the number of customers from last year who are still customers this year. i.e. if you had 100 customers last year and 45 are still doing business with you this year, then your retention rate is 45%. Current Retained Customers ÷ Customers from Last Year
  • 19. Customer Lifetime Using your retention rate of 45%... CL = 1/(1-.45) = 1.8 Your Customer lifetime is 1.8 years Customer Lifetime (CL) = 1÷(1-RR)
  • 20. The Last Piece Is Your Discount Rate…
  • 21. Discount rate is the interest rate you borrow at in your business. The concept is based on the time value of money, the premise that a dollar today is worth more than a dollar tomorrow.
  • 22. The longer you calculate your customer lifetime to be, the more important the discount rate becomes and the more inaccurate your model becomes when you ignore the rate. Just Remember…
  • 23. Now That You Have the Parts: Understanding Customer Segmentation
  • 24. At the heart of customer segmentation is the belief that all customers are not created equal and that understanding the differences among customer segments is key to effectively acquiring and retaining customers.
  • 25. How would I group my customers if I wanted to customize my marketing, retention, or product offerings? Ask Yourself One Simple Question:
  • 27. Break down the segments based on differentiated products or services. For example, if your department provides distinctly different services to both small businesses and individuals, you may consider calculating a Customer Lifetime Value for each segment.
  • 28. If your business does not have obvious divisions, you should consider what factors have the most impact on customer buying characteristics – or segment on behavior itself.
  • 29. customersthatstick.com Start with your gut… If you know your business, you probably have an innate sense of what types of customers act what way. Try to fill in the blanks in this statement…
  • 31. Using CLV Technically, the calculation of Customer Lifetime Value should include acquisition and retention costs.
  • 33. customersthatstick.com Take your marketing expenditures for a period and divide by the number of new clients in the same period. What Does It Cost to Get a Customer In the Door?
  • 34. Try to find a period that is relevant for you and your business based on how you approach your marketing and make sure to account for the lag time between marketing and acquisition.
  • 36. • Perks for longevity • Discounts for existing customers • Freebies for certain buying behaviors Start with Obvious Hard Costs PS: Make sure to average the cost out across the entire customer base.
  • 37. If you send your sales staff to a customer service seminar, is that a retention cost? Think About Your Soft Costs If you redesign the help section on your web site, is that a retention cost?
  • 38. One question that should help determine if a soft cost belongs in the retention “bucket” is this: What is our primary reason for incurring these costs?
  • 39. If customer satisfaction, retentio n or any similar customer service- based sentiment is the primary reason, it is probably safe to consider the expenditure a retention cost.
  • 40. If you are segmenting your customer base, you will need to apply these calculations for each segment, not the customer base as a whole. A Final Note on Acquisition and Retention
  • 41. Tying It All Together Now that you have your CLV and a grasp on your marketing and retention costs, it is time to put the two together.
  • 42. An Example… Customer Lifetime Value and Acquisition
  • 43. customersthatstick.com The owners of a golf pro shop determine that most of their customers come from two zip codes, one to the east and one to the west. The owners decide to calculate the CLV separately for each zip code. They discover that the CLV for the eastern customers is 4 times the CLV for the western customers.
  • 44. They also find that the eastern zip code is 30% of their customer base but 80% of their profit. The western zip code represents 70% of their customer base and 20% of their profit.
  • 45. The pro shop owners have been spending their marketing dollars evenly between east and west. Calculating the CLV for each segment made it obvious that their marketing dollars were not being allocated effectively.
  • 46. Final Thoughts Computing Customer Lifetime Value can be one of the most eye-opening and rewarding exercises in business. Knowing your CLV can help you truly understand the value and effectiveness of your marketing and retention expenditures.
  • 48. We hope that you can derive true value from a back of the napkin approach to CLV, but you should realize the limitations of using such a non-scientific approach. Each business is different, but there might be a time where you feel the need to get your geek on. If so, here are some more resources dedicated to CLV.
  • 49. customersthatstick.com 1. An infographic on calculating Lifetime Value from Kissmetrics 2. Modeling Customer Lifetime Value from Gupta et al (An academic tract on the subject. PDF link.) 3. Customer Lifetime Value calculator from Harvard Business Review Publishing 4. Customer Lifetime Value overview from Wikipedia (i.e. Getting Your Geek On)
  • 50. Want more on Customer Service and the Customer Experience? Download your copy of our FREE eBook, 7 Secret Customer Service Techniques Every Expert Knows. Click the book below! FREE!
  • 51. In addition to your FREE eBook, you will receive our eNewsletter, The Customer Conversation including… Exclusive Customer Service Content not published anywhere else Our popular Monday Motivation series Customer Service tools and resources eBook Click the Tab to Get Your Free… Also Connect with Us on Social Media!
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