Customer Lifetime Value Analysis Flashcards
Customer Lifetime Value
Metric that allows managers to understand the overall value of their customer base and to evaluate how well their management strategies are working
Customer Acquisition Costs
direct consequence of asset acquisition strategies employed by the company to attract new customers to the firm
Customer Profitability
maximum value that the firm extracts from each customer on an annual basis
Annual Profits of Customer Equation
subtracting the total variable cost of the products the customer buys from the total revenues obtained.
Annual Profits of Customer
depend on the type of customer (price sensitivity, purchase frequency, etc.) as well as the costs incurred in serving the customer
Customer Profitability (CLV)
Contribution Margin
Customer Longevity
duration the firm is able to retain the customer (customer loyalty)
Simple CLV Formula
= contribution margin * Life - Acquisition Costs
Churn Rate (CR)
Percentage of customer who end their relationship with the company in a given time period (by segment)
Retention Rate (RR)
Percentage of customers who continue their relationship with the firm
Retention Rate Equation
1 - Churn Rate
Survival Probability (s)
Probability that a customer has a relationship with the firm during a given time period
(=1 in first period) Decreases over time
Customer Survival Probability Equation
equal to the customer survival probability in previous period multiplied by the retention rate
Expected Purchasing Life (L)
Number of time periods the customer is expected to continue the relationship
Expected Purchasing Life (L) Equation
1/ CR
*CR does not change over time & infinite possible life
