Consumer

lifetime value
By Prof. Bhuwandeep
Six stages of Consumer lifecycle
Stage 1: Awareness

• Your relationship with a

customer begins. when they first
become aware of the existence
of your brand, product, or
service. While consumers see an
average of 362 marketing
messages each day, they only
notice 86 of them.
• And the old marketing rule of
thumb is that a consumer has to
see your message seven times
before they’re even aware of it!
 Stage 2: Engagement
(Optional)

• Customers making a more significant

purchase—say, buying a new car or planning
a theme park vacation—will often take this
optional step of engaging with a brand. Once
they’re aware of you, they’ll start seeking
out your marketing content by following you
on social media, signing up for your emails,
etc.
Stage 3: Evaluation

• Every customer goes through some version

of this stage, whether it’s months of
research and comparison or just a quick
“gut check” before making a decision. One
of the most effective ways to stand out
from your competitors at this point is by
offering robust digital self-service. Just like
customers seeking support, consumers who
are evaluating products or services start by
trying to find the answers themselves
Stage 4: Purchase

• Stage 4 is crunch time, when

consumers make their final
decision 83% of consumers require
some degree of support while
making an online purchase.
• 53% will abandon that purchase if
they can’t find a quick answer to
their question.
• Over 40% of consumers say that
having questions answered by a live
person during an online purchase is
one of the most important features
a website can offer.
Stage 5: Product and Support Experience

• Every interaction is an opportunity to prove that

you’re interested in building a relationship with your
customers, not just making a sale.
• In fact, 76% of consumers view customer service as
the true test of how much a company values them,
and 97% say it’s an important factor in deciding which
brands to choose or remain loyal to
Stage 6: Bonding

• This final stage is when you cement your relationship. You

should be continuing to provide quality service and
support, nurturing a connection with proactive
engagement, and taking every opportunity to create an
emotional bond.
• If you do those things well, you’ll see your customers
jumping back into the lifecycle by buying again, buying
more, and—best of all—encouraging others to join them.
Customer lifetime
value

• Customer Lifetime value is defined as “ present

value of future cash flows attributed to customer
relationship “
• Its has three aspects Economics , Political and
Social aspects
• The economic theory concerns about “time value
of money notion” , risk of loss and opportunity
cost
Introduction
If company continually spends more money to acquire
customers than a customer generates, the company often
goes out of business. Therefore, it is important to calculate a
customer’s lifetime value and use these calculations to
increase the company’s profitability.
 For instance, in October 2009, Groupon offered its first
deal. For $13 (one half the normal price of $26) a
customer could purchase two pizzas from the Chicago
Motel Bar pub. Groupon took one half of the $13 and
gave Motel Bar one half of the $13. On average the
variable cost of a pizza is approximately 35 percent of
the pizza’s retail price. Motel Bar received $6.50 for
pizza that had a variable cost of $9.10. At first glance it
Example seems that Motel Bar would lose $2.60 for each
customer who took the Groupon deal; however, Motel
Bar understood that the Groupon deal might bring in
new customers who would earn Motel Bar a significant
future profit that would more than make up for the
$2.60 on the customer’s first pizza purchase. If the
merchants using Groupon did not understand the
importance of the long-term value generated by a
customer, then Groupon would have never existed.
Basic Customer Value
Template

Per period discount rate (typically 10

percent to 16 percent per year): An NOTE The discount rate and retention
annual discount rate of 10 percent rate must refer to the same length of
means, for example, that $1 received a time. For example, if an annual retention
year from now is equivalent to 1/1.10 rate is used, then an annual discount rate
dollars received today. Most analysts use must be used.
i to denote the per period discount rate.
Basic Customer Value Template

Per period retention rate: A retention rate of 60 percent per year means
that during any year you lose 40 percent of the customers and you retain 60
percent of your customers. The quantity 1– retention rate is known as the
churn rate. Most analysts let r = retention rate.
Basic Customer Value
Template

■ A fraction (1– retention rate) of the

customers is lost each period. The
fraction of customers lost each period
is known as the churn rate.

■ The number of periods considered is

limited to 360. Even if a period is a
month, this covers 30 years. As churn
■ The customer generates the same and discount rate effects are
profit margin each year. compounded, the per period value of
an initial customer becomes small
after this number of periods, so you
can neglect it.
Basic Customer Value Template
Closer Look • Discount rate
 the number of customers generating profits during
the first period:

Closer look ■ 100 for beginning of year

■ 100*( retention rate) for end of year)
■ .5*100*(1+ retention rate) for middle of year)
• Find out the value of
S = 1 +.2+.2^2+.2^3+.2^4+.2^5……………………………….till infinity Eq 1
.2 S = .2+.2^2+.2^3+.2^4+.2^5……………………………….till infinity Eq 2
Eq 1 – Eq 2
0.8 S = 1……………………………………
S = a + ar+ ar^2………………………..
rS= ar+ ar^2………………………..
S ( 1-r) = a , S= a/1-r
• CLV = 1+ r/1+i + r^2 / (1+i)^2………………………..
• CLV ( r/1+i) = r/1+i + r^2 / (1+i)^2………………………..
• CLV ( 1 – r/i+1) = 1

CLV = (1+i)/(1+i-r)
 During year 1 if the annual discount rate is
10 percent then the following are true:
■ End-of-year discount factor for year 1 is
1/1.10.
Discount rate ■ Beginning-of-year discount factor for year
1 is 1.
■ Middle-of-year discount factor for year 1
is 1 /(1.10)^.05
 If you assume the per-period profit
generated by a customer does not
An Explicit depend on how long he has been a
customer, you simply compute the
Formula for value of the customer as:
the (Profit per Period) * (Multiplier)
Multiplier
 Now take a closer look at the
multiplier. Let i = per period discount
An Explicit rate and r = per period retention
rate. If you assume that for an
Formula for infinite number of periods each
the customer generates $1 of profi t at
the beginning of each period, then
Multiplier you can derive an explicit formula for
the multiplier.
 • If you begin period 1 with a single
customer, then at the beginning of
An Explicit period 1, you receive $1 from one
customer; at the beginning of
Formula for period 2, you receive $1 from r
the customers; at the beginning of
period 3, you receive $1 from r2
Multiplier customers, and so on.
 Discounting these profits by 1 / (1 + i) during period 2, 1 / (1 + i)2
during period 3, and so on results in the total profit generated by
your initial customer, which may be written as Equation 1:

An Explicit Multiplier = 1 + r / (1 + i) + r2 / (1 + i)2 + r3 / (1 + i)3 + …....Eq 1

Multiplying Equation 1 by r / (1 + i) yields

Formula for Equation 2: (2) r * Multiplier / (1 + i) = r / (1 + i) + r2 / ((1 + i)2 + r3 /

(1 + i)3 + …

the Subtracting Equation 2 from Equation 1 yields (1 + i − r) / (1 + i) *

Multiplier Multiplier = 1 or

Equation 3: (3) Multiplier = (1 + i) / (1 + i − r).

A problem to solve – Fill
in the Blanks
Therefore, suppose the annual
retention rate for cable TV
subscribers is 80 percent and the
annual discount rate is 10 percent.
Assuming end-of-year cash flows,
the multiplier is-------------. Assuming
an annual profit margin of $300, a
customer’s value would equal
………………………….
 Customers 1 and 2 have been with a company
for 12 months. Customer 1 has made four
purchases and Customer 2 has made two
Question ? purchases. Each customer’s last purchase was
at the end of month 8. Which customer is
most likely to still be active? Can you explain
this result?
Factors to consider
The following data is needed:
■ N = Number of purchases
■ t = Time of last purchase
■ T = Time elapsed between acquisition of customer and
present time
 After defining T* = t / T, the authors show that
For example (T*)^n estimates the probability that the
customer is still active. For example, suppose
that T = 10 and a customer has made a
purchase at times 1, 5, 6, and 9. You can
estimate the probability that a customer is still
active to equal .9^4 = 0.6561.
Calculate the probability that consumer is
active in
1) Nov – 44% / 62%
2) Dec – 31% / 40%
• If you make purchase in 1, 5 , 6 , 9 months , then what is the prob.
That you are active in
• A) Month of Nov
• B) Month of Nov if you make a purchase in Oct. as well
Calculations
• Nov- T*= (9/11)^4=44%
• T*= 10/11, P= T*^5= 60%
Reconciling the formula