1. Lifetime Value Analysis

2. $ Productivity Drivers Creation of Value Through Exchange
Competition: $ $ (Falling Prices) $
$ $ $
Productivity
Drivers
Mass Marketing Customize, target low incidence, high value customers
Mass Customization
DATABASE
1 to to 1
Marketer Pushes Product (Queries, Mail Merge) Customer Pulls Product (Web App)
Segmentation
& Targeting

3. Learning Objective Define customer lifetime value (LTV). Explain
what the discount rate is and how it is
calculated. Discuss the three main components
of an LTV table and how they are related. Be
able to fill in missing values of a basic LTV
table given the components of the discount rate
and some of the table values. Explain how the
focus on LTV has shifted strategic thinking in
business?

4. What is ? The net present value of the profit you will realize
from having a particular customer during the time
in which he or she is purchasing your products.

5. Duration of Lifetime Value?
The length of a typical customer lifetime
differs from one product to the next.

6. Section Year 1 Year 2 Customers Retention Rate Spending Rate
Year 1
Year 2
Customers
Retention Rate
Spending Rate
Total Revenue
Variable Cost % Total Revenue
Variable Cost $
Acquisition Costs
Total Costs
Gross Profit (TR - TC)
Discount Rate
Net Present Value Profit
Cumulative NPV Profit
Lifetime Value
Section

8. How Discount Occurs Gross Profit Discount Rate GP DR Yields
Dividing the gross profit by the discount
rate yields the discounted future profit or
Net Present Value of the profit. GP DR
$ $ $ $ $100
Yields

9. Discount Rate Formula Where: D is the discount rate
i is the inflation rate
rf is the risk factor
n is number of years, i.e., 0 (year 1), 1
(year 2), 2 (year 3), 3 (year 4).

10. D = [1 + (i x rf)]n Year 1 = [any value]0 Year 2 = [1 + (.04 x 3)]1
Assume inflation is 4% and risk factor is 3.
Year = [any value]0
Year = [1 + (.04 x 3)]1
Year = [1 + (.04 x 3)]2
Year = [1 + (.04 x 3)]3

11. Year 1
Year 2
Year 3
Year 4
Customers
2,600 2
800 5
Spending Rate
$150
$190 3
$325
Total Revenue 1
$228,000
$200,000 4
Variable Cost $ 12
$75,700 20 9
Acquisition Costs
$158,600
Total Costs 11 10 19
$18,525
Gross Profit
($2,600) 15 18
$166,725
Discount Rate 16
1.266 22
Net Present Value Profit 13
$135,378
$126,420
$117,096
Cumulative NPV Profit 17 21 23
Life Time Value 14
$51.07
$99.69 24
Inflation 25
Risk Factor
2.5

12. Strategy Implication of Lifetime Value

13. Because customers are
both literally and figuratively
mortal, businesses must
acquire new customers to
survive. Acquiring them has
been the traditional focus of
marketers. Since it was an
essential task that seemed
to produce profits, customer
acquisition was frequently
seen as the only focus of
marketers.

14. Lifetime value analysis has
refocused marketing efforts
on serving and retaining
existing customers.