4.6 customer lifetime value


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Basic CLV calculations. A bit nerdy but useful in some cases.

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4.6 customer lifetime value

  1. 1. This presentation is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this presentation are the sole responsibility of Rick Rasmussen and do not necessarily reflect the views of USAID or the United States Government. Customer Lifetime Value
  2. 2. Customer Lifetime Value • A prediction of the net profit attributed to the entire future relationship with a customer – CLV: Customer Lifetime Value – LCV: Lifetime Customer Value – LTV: User Lifetime Value • Typically used in B2C, but can be applied to B2B or B2B2C
  3. 3. Customer Lifetime Value • The “paid engine of growth” • Used together with Customer Acquisition Costs • Customer Lifetime Value must be greater than Customer Acquisition costs – CLV > CAC • As a marketing metric it places emphasis – long-term customer relationships – Satisfaction and referrals – Renewal vs. churn
  4. 4. Levels of Sophistication • The prediction model can range from a crude analysis to the use of complex predictive analytics techniques • Choose the right approach to get an appropriate value
  5. 5. Inputs to a CLV Model • Contribution margin • Churn rate – the percentage of customers who end their relationship with a company in a given period. One minus the churn rate is the retention rate. Most models can be written using either churn rate or retention rate. If the model uses only one churn rate, the assumption is that the churn rate is constant across the life of the customer relationship. • Retention cost – The amount of money a company has to spend in a given period to retain an existing customer. Retention costs include customer support, billing, promotional incentives, etc. • Period – the unit of time into which a customer relationship is divided for analysis. A year is the most commonly used period. – Customer lifetime value is a multi-period calculation, usually stretching 3–7 years into the future. In practice, analysis beyond this point is viewed as too speculative to be reliable. – The number of periods used in the calculation is sometimes referred to as the model horizon. • Discount rate – The cost of capital used to discount future revenue from a customer.
  6. 6. Simple e-commerce Example Monthly Churn Rate % • For example: $100 avg. monthly spend x 25% margin 5% monthly churn (Time values can be daily, monthly, quarterly, annual, etc. but must be consistent) = $500 LTV Average Monthly Revenue per Customer Gross Margin % per Customer x
  7. 7. Churn • Customers lost in a period • Rate plays a huge role in success for a subscription based business • Churn and LTV are closely tied • Average customer lifetime in months = 1 / Monthly Churn
  8. 8. 100 50 20 0 20 40 60 80 100 120 1% 2% 5% LTV vs Churn Rate Months
  9. 9. Standard Model (includes time value of money) CG yearly gross contribution per customer, r yearly retention rate (1 – churn rate), d yearly discount rate.
  10. 10. More Accurate Model CG periodic gross contribution per customer, M (relevant) retention costs per customer per period, n series horizon (in periods), r periodic retention rate, d periodic discount rate.