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Customer Lifetime Value

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Calculating and using Customer Lifetime Value in your firm.

Published in: Business, Education

Customer Lifetime Value

  1. 1. Improving the Customer Experience - Lifetime Value of a Customer Ed Kless @edkless
  2. 2. “The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value.” Peter Drucker
  3. 3. $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 Cost Price Value
  4. 4. Calculating Customer Lifetime Value Where GC is yearly gross contribution per customer, M is the (relevant) retention costs per customer per year, n is the horizon (in years), r is the yearly retention rate, d is the yearly discount rate.
  5. 5. Calculating Simplified Customer Lifetime Value – (No really!) Where GC is yearly gross contribution per customer, r is the yearly retention rate, d is the yearly discount rate.
  6. 6. Calculating Simplified Customer Lifetime Value – Example Example: If the gross contribution (profit) of a customer is $500 per year, your retention rate is 95 percent, assume a discount rate of 2 percent (using interest rate as a proxy), this would yield a CLV of $6,786. So what and who cares?
  7. 7. How Retention Rate Affects CLV $0 $2,000 $4,000 $6,000 $8,000 $10,000$12,000$14,000 80% 90% 95% 98% $1,818 $3,750 $6,785 $12,250 Customer Lifetime Value
  8. 8. 8 0 1 2 3 4 5 6 7 8 9 10 Not at all likely Extremely likely Likelihood of recommending         Detractors Promoters Passives What is NPS?
  9. 9. Calculating Net Promoter Score %P 30% 30% -0- 45% 35% %D 25% 35% NPS 5 (5)
  10. 10. Why this matters! “An increase in NPS of 5% increases profits by 25 to 95%.” Fred Reichheld Loyalty Rules!
  11. 11. Getting Customers on The Grid • Customer name • Lifetime Revenue • Net Promoter Score • Customer Likeability Score (or other index)
  12. 12. Customer Likeability Score (CLS) 1. Disagree strongly 2. Disagree 3. Disagree somewhat 4. Agree somewhat 5. Agree 6. Agree strongly On a scale of 1-6, please rate your level of agreement with the following statement: This customer is clearly a joy to work with.
  13. 13. The Grid C B A F E D Net Promoter Score Neutrals (7-8) Promoters (9-10)Detractors (0-6) CustomerLikabilityScore DislikeLike
  14. 14. Customers On The Grid 0 2 4 6 0 2 4 6 8 10 C B A F E D Net Promoter Score Neutrals PromotersDetractors CustomerLikabilityScore DislikeLike
  15. 15. For more on the Sage Customer Loyalty Program visit: http://www.sagepartnermarketing.com Navigate to: Partner Programs >> Partner Advantage >> Customer Loyalty Program
  16. 16. Value Gap • Basic – Customer name – Revenue from the customer per some discrete period – Value provided to the customer in that same period • Advanced – Customer name – Value that could be provided over a future discrete period – Possible acceptable price (revenue) for that provided value
  17. 17. Value Gap Analysis Customer name Value Provided Revenue The Gap Potential Value Potential Revenue New Gap Customer 1 1,000 500 500 2,000 1,250 750 Customer 2 - - Customer 3 - - Customer 4 - - Customer 5 - - Customer 6 - - Customer 7 - - Customer 8 - - Customer 9 - - Customer 10 - - Customer 11 - - Customer 12 - - Customer 13 - - Customer 14 - - Customer 15 - - Customer 16 - - Customer 17 - - Customer 18 - - Customer 19 - - Customer 20 - - Total 1,000 500 500 2,000 1,250.00 750.00

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