ASSESSING A CUSTOMERS VALUE

GROUP - 5

CUSTOMER RELATIONSHIP MANAGEMENT (CRM)

Identification of valuable customers
Acquisition of new customers
Impact of new sales activities
Customer retention

CUSTOMER LIFETIME VALUE (CLV)

CLV is the net margin per sales multiplied by the number of sales that can be made to the customer over
his entire lifetime minus the acquisition cost for that customer, all suitably adjusted to present value terms.

Importance of CLV:
It can be leveraged to offer discounted products, superior customer service and loyalty

programmes
It can act as an early warning system when customers starts to engage less

Examples of usage of CLV:

In hospitality sector it can be used to offer free room upgrades
In Airlines industry it can be used to offer discounted fares to the customers with high

value

FORMULA TO CALCULATE CLV

CHALLENGES IN ESTIMATION OF CLV

In non-contractual setting it is difficult to estimate the

number of sales that can be made to a customer

The assumption that net margin per sales is same for all
sales made during customers lifetime is often unrealistic
Time of sale is not deterministic. Hence the present value
of cash flows becomes a random variable

CRITICAL ELEMENTS FOR CLV CALCULATION

Retention rate should be estimated carefully for customers who repeat purchase after a long
period of inactivity.

CLV CALCULATIONS : SCENARIO I

Assumptions:
1. The customer walks into the store and hence the acquisition cost is almost nil.
2. Customer buys the product on 1st January every year for three years
3. Net margin: Rs. 1000 per product and Discount rate: 10% per annum

Applications:
1. Customer retention: Determining which customers are more valuable than others and offer discounts

appropriately
2. Customer acquisition: How much should company spend to acquire this customer
3. Loyalty programmes and cross-selling to high-valued customers

CLV CALCULATIONS : SCENARIO II

Refined assumptions:
1. Chance of customer buying a suit is not same for each year. Assuming chance in first year is 0.8,

in 2nd year is 0.64 and in 3rd year is 0.512

Illustration: Customer retention:

1. Suppose the store provides a discount of 10% in 1st year and 20% in 2nd year which

increases the purchase probability to 0.72 in 2nd year and 0.65 in 3rd year.

CLOSING NOTES ON CLV

CLV model takes futuristic view to identify profitable customers, there are other

frameworks as well that evaluate past behaviour to identify profitable segments.

Predictive power of CLV can be improved by developing sophisticated models to estimate

customers survival rate at various points of time.

THANK YOU