Life Time Value Analysis

1
Life Time Value Analysis

• Definition LTV is the net present value (NPV)
  of the profit that you will realize on the
  average new customer during a given number of
  years.
• LTV can be used in the development of marketing
  strategies.
• Many different factors cause LTV to change some
  controllable, some not.

2
Why is LTV Not Used?

• Few marketers understand it. Time value of money
  not universally understood.
• Marketers do not have access to a database of
  relevant information.
• Marketers under pressure to produce. LTV
  requires testing and tracking behavior over TIME.

3
Analyzing a LTV Table

• (refer to table 3-1 handout)
• Start out with a 1000 customers who were issued a
  store credit card.
• Retention rates can change but often remain
  stable.
• Sales, costs, profits and NPV
• Discount Rate (1I)n

4
Lifetime Value Calculations
5
Strategy Development Using LTV

• LTV provides testing ground for alternative
  promotional strategies.
• Promote better customer relationships
• CRM strategies can affect the following
• Retention rate
• Referrals
• Increased Sales
• Reduce Direct Costs, e.g. alternative channels
• Reduce Marketing Costs, efficient targetign

6
Strategy Development Using LTV (continued)

• (refer to handout, Table 3-2)
• Activities build a database, targeted
  communication, collect survey data,
• Evaluate ROI of activities.
• Note addition of referral rate, increase in
  retention rate, increase in average sales, etc.

7
Strategy Development Using LTV (continued)

• Factors affecting retention rates
• Type of promotions used to attract custs.
• Price charged for the product.
• Efforts to get the customers to buy again.
• Relationship building efforts directed towards
  current customers.

8
Strategy Development Using LTV (continued)

• Store has increased LTV for each customer by
  51.63 after five years.
• Assuming 200,000 customers translates into an
  increase in profits by approx. 10 million (NPV
  over 5 years).
• LTV grows with increases in retention rate.
• Can be used to assess acquisition costs