Customer Lifetime Value

1. Customer Lifetime Value Fall 2013 Dr. Hettche

2. Lecture Overview • Review • Two Essential Metrics leading to CLTV • SPSS • CLTV or LTV and Value-based Marketing

3. Not all customers are created equal High value customer . . . . . . . . Low value customer

4. 2nd Example • Large B2B company • 93% of the company’s revenues are determined by 8% of its customers

5. Demand Generation Marketing Vs. Value-based Marketing

7. You Win 1Million $$$$ $520,000 Now.. . . . . . . . or 100,000 for 10 years

9. You Win 1Million $$$$ $520,000 Now.. . . . . . . . or 100,000 for 10 years r = 10% $614,457 • Present Value r = rate of return

10. r = Discount Rate Cost of Capital Hurdle Rate 5% 10% 12%

11. Net Present Value C = cost of marketing B = cash benefit r = rate of return

12. ROI

13. Another Definition Also known as LTV The net present value of the profits linked to a specific customer once the customer has been acquired, after subtracting incremental costs associated with marketing, selling, production and servicing over the customer’s lifetime (106).

14. Another Definition LTV (definition) The net present value of the profits linked to a specific customer once the customer has been acquired, after subtracting incremental costs associated with marketing, selling, production and servicing over the customer’s lifetime (106).

15. Simple Model AC = acquisition costs M = margin C = cost of marketing p = probability C with churn N = years (or time pd) r = discount rate

17. CLTV or LTV • Lifetime value is a measure for the individual *not the group

18. Where’s the Statistics

19. TIME Horizon • Three Years • Five Years • Sector/Category Specific • Aim low

20. Acquisition Cost • Sales commissions • Advertising • List Rental • Discounts • Sales

21. Tweaking the basic formula3 classes of LTV Models • Simple Retention Model • Financial services, B@B, magazine subscriptions, pharmaceutical drugs • Hazards Model (Weibull distribution) • Migration Model • Retailing, catalogs, and consumer packaged goods • Recency states (as well as frequency states) • LTV Model with unobserved customer attrition

22. 3 take aways: Retain and Cross-sell/Up-sell to HIGH CLTVs Migrate medium-value CLTVs to HIGH CLTVs Reduce your cost of NEGATIVE CLTVs Value –based Marketing

25. 3 Types of BAD Best Buy: Returns, open box discount, and restocking fees Continental Airlines: bereavement fares Intuit Quickbooks: 800 service calls in one year $2.50 to $7.50 per service call $6 per transaction (in person teller) 25 cents for ATM

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27. Some Troubleshooting