Figure 6.10 Different representations of lifetime value calculation
Lifetime value modelling at a segment level (4) is vital within marketing since it answers the question:
How much can I afford to invest in acquiring a new customer?
If online marketers try to answer this from a short-term perspective, as is often the case, i.e. by judging it based on the profit from a single sale on an e-commerce site, there are two problems:
1 We become very focused on short-term return on investment (ROI) and so may not invest sufficiently to grow our business.
2 We assume that each new customer is worth precisely the same to us and we ignore differentials in loyalty and profitability between differing types of customer.
Lifetime value analysis enables marketers to:
• Plan and measure investment in customer acquisition programmes;
• Identify and compare critical target segments;
• Measure the effectiveness of alternative customer retention strategies;
• Establish the true value of a company's customer base;
• Make decisions about products and offers;
• Make decisions about the value of introducing new e-CRM technologies.
Figure 6.11 gives an example of how LTV can be used to develop a CRM strategy for different customer groups. Four main types of customers are indicated by their current and future value as bronze, silver, gold and platinum. Distinct customer groupings (circles) are identified according to their current value (as indicated by current profitability) and future value as indicated by lifetime value calculations. Each of these groups will have a customer profile signature based on their demographics, so this can be used for customer selection. Different strategies are developed for different customer groups within the four main value groupings. Some bronze customers such as groups A and B realistically do not have development potential and are typically unprofitable, so the
Figure 6.11 An example of an LTV-based segmentation plan
Figure 6.11 An example of an LTV-based segmentation plan aim is to reduce costs in communications and if they do not remain as customers this is acceptable. Some bronze customers such as group C may have potential for growth so for these the strategy is to extend their purchases. Silver customers are targeted with customer extension offers and gold customers are extended where possible although they have relatively little growth potential. Platinum customers are the best customers, so it is important to understand the communication preferences of these customers and to not over-communicate unless there is evidence that they may defect.
To illustrate another application of LTV and how it is calculated, take a look at the last example in Activity 6.1.
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