Customer lifetime

value
What it is
Why it
matters
Using it in
practice

SnowPlow Analytics
Ltd
What is customer lifetime
value?
• Prediction of the net profit attributed to the entire future relationship with
a customer (wikipedia)

£50 £10
£1000
£100
• The most important metric in business analytics (incl.
digital)?

• Not widely used… (Because it is hard to calculate, esp. in digital)

• Example: using CLV to acquire customers for a mobile game

SnowPlow Analytics
Ltd
Why is customer lifetime value
important?
20% of our Customer
customers account acquisition costs
for 80% of our sales keep rising

The best customers might be It is often more cost effective

– Brand loyal to spend money retaining
– Don’t “shop around” existing customers than
acquiring new customers
– Rich
– Different from the
average

SnowPlow Analytics
Ltd
Where is customer lifetime value
used?
Customer acquisition Customer relationship
management
1. Use average CLV to inform • Maximize customer lifetime value acquisition cost
– Instead of maximizing other
– E.g. pay more for a customer than metrics
recoup on first purchase, based e.g. utilisation

Increasing sophistication
on likelihood that he / she will – E.g. email marketing to
make a second / third / forth encourage repurchase
purchase)
• Differentiated approach for different
2. Calculate CLV per customer segments
channel
– pay more more to acquire – Spend more cultivating loyalty in
customers on channels with higher the most valuable customers
CLV (personalisation) e.g. loyalty
– E.g. search engine marketing vs schemes
price comparison sites

Acquire valuable Retain valuable

customers customers
SnowPlow Analytics
Ltd
Calculating customer lifetime value: 2
challenges
• We need to be able to attribute profit to a customer over his / her entire
lifetime
– Profit across sales channels (on and offline)
– Single customer view?
– Web analytics packages visit rather than customer-centric

• We need to be able to forecast lifetime value based on past behaviour to

date
– Need a model that matches the data (reasonably well)
– Needs to be done fast if used to acquire customers
– Limited data set
– Prediction is an art, not a science

SnowPlow Analytics
Ltd
Meeting those
challenges:
1. Measuring actual customer lifetime value

1. Identify the moments in a customer journey where value is generated

2. Tie records for a specific customer together into a complete journey

– E.g. using sales records, loyalty programmes, cookie IDs
– If it is not possible to do at a customer level, then do at a segment level (and
infer
average CLV from segment lifetime value / number of customers)
3. Measure the profit made at each
point Doing this is getting easier
– Normally use gross profit for all the time:
simplicity 1. Improvements in
4. Sum them over the customer’s analytics solutions
“lifetime” e.g. Universal
Analytics
2. Companies are getting
better at getting user’s
to identify themselves
SnowPlow Analytics e.g. via logins
Ltd
Meeting those
challenges:
2. Forecasting value based on past behaviour to date

1. Identify the moments in a customer journey where value is generated

2. Examine the value created at each moment: what is it a function of?

– Does it vary much by customer / segment/ time / anything else? (I.e. wide variance
in values)
– If that variation is significant, what is it a function of?

3. Examine the likelihood of moving from one moment to-the-next: what is it a

function of?
– Does it vary much by customer / segment / time / anything else?
– If that variation is significant, what is it a function of?

Developing a model is likely

much easier for a telecoms
operator (reliable subscription
revenue) rather than an
online
An example: using CLV to drive customer
acquisition
• Mobile game

• Free to download, monetise by in-app purchases or virtual goods

• Virtual goods can be bought at any stage of playing the game (i.e. very frequently
or never at all)

• Wide variety across customer base in terms of customer lifetime value

– Zero value from majority of users. (Who play without ever buying an item.)
– Small fraction account for disproportionate amount of value

• Crucial to acquire users from channels where a high proportion of

acquisitions
have high CLV

SnowPlow Analytics
Ltd
Calculating CLV: the
steps
• Measuring the lifetime value of existing customers was easy:
– All the data in a single system
– Easy to track customer consistently (through single account)

• Forecasting value based on behaviour to date was hard:

– Massive variation number of purchases by customer (from 0 to a very high number)
– Massive variations in the length of time consumers play game (download and never
play
vs download and play for months / years)
– However, limited variation in each purchase value (all virtual goods cost roughly
the same)

SnowPlow Analytics
Ltd
One key insight led to a simple model for
•CLV
Customer lifetime value varied widely between channels

• The best predictor of whether a customer would purchase a virtual good in future was
whether they had purchased a virtual good in the past

• Within each channel, the likelihood that a customer would make another purchase
was constant (i.e. independent of the number of purchases they had made to date)
– This means lifetime value can be modelled as a geometric series where each term in the
series represents a purchase event
– The ratio between terms represents the probability that a user makes an nth purchase
having made
an (n-1)th purchase. That ratio, r, is what needs to be measured for each different channel
– Once you have r for a channel, then the lifetime value of the customers acquired can be
estimated: (p = average price of virtual good)

Value of 1st purchases Value of nth purchases

SnowPlow Analytics
Ltd
So
what?
• Easily prediction lifetime value by channel:
– Measuring r is easy: it is calculated simply from the ratio of 1st purchases, 2nd
purchases etc.
Keep the model as simple as possible. Use intuition
about customer behaviour to derive key modelling
• Fast insights
results:
– Purchase events were, as a whole, frequent enough that a value could be calculated for r based
on only a few days worth of data

• Accurate results:
– Estimations of lifetime value were found to be
accurate to 12%

• Powerful results:
– Marketing budget was optimized to those channels driving the most valuable users

If you have large variation in customer lifetime value

between segments, your CLV prediction might not be
very precisSenobwuPtol cawnAsntailllytbci esiLntcdredibly useful
Questions

• Where do you use CLV? Where do you want to be using

it?

• What type of models have you built?

– What worked?
– What didn’t?
– Why?

• Any other questions or insights?

SnowPlow Analytics
Ltd