INSTITUTE –University School of Business

DEPARTMENT –Management

MARKETING ANALYTICS (23BAT-737)

Prepared by: Parveen Kumar Abrol

Chandigarh University
UNIT-3 – Chapter 3.1
DISCOVER . LEARN . EMPOWER

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 Learning Objectives Introduction to
marketing
CO Title Level
Number

CO1 Remembe
To define management and marketing research r
problem.
Topics for Discussion
• What is Customer Lifetime Value.
• How is customer lifetime value different from other customer metrics?
• Why is customer lifetime value important to your business?
• How much are your existing customers costing you?
 Introduction to Customer Lifetime Value

Customer lifetime value (CLV) is one of the key stats to track as part of a customer experience
program. Customer lifetime value is a measurement of how valuable a customer is to your
company, not just on a purchase-by-purchase basis but across entire customer relationships.
Learn how to calculate customer lifetime value and increase your customer ROI with our
guide.
Customer lifetime value is the total worth to a business of a customer over the whole period
of their relationship with the brand. Rather than looking at the value of individual
transactions, this value takes into account all potential transactions to be made during a
customer relationship timespan and calculates the specific revenue from that customer.
There are two ways of looking at customer lifetime value: historic customer lifetime
value (how much each existing customer has already spent with your brand) and predictive
customer lifetime value (how much customers could spend with your brand). Both
measurements of customer lifetime value are useful for tracking business success.

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How is customer lifetime value different from other
customer metrics?
• Customer lifetime value is distinct from the Net Promoter Score (NPS) that
measures customer loyalty, and CSAT that measures customer satisfaction because it is tangibly
linked to revenue rather than a somewhat intangible promise of loyalty and satisfaction.
• It’s a confirmed understanding of how much loyal customers bring to your business financially,
or in the case of predictive customer lifetime value, how much they are likely to bring based on
past data.
• Knowing existing customers’ lifetime values helps businesses to develop targeted strategies to
acquire new customers and retain existing ones while maintaining profit margins. Read on to
understand why customer lifetime value is a key metric to track, and how to calculate and
improve on it.

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Why is customer lifetime value important to your
business?

• It helps you save money

• It helps you spot and stop attrition

• It helps you find your best customers and replicate them

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 How much are your existing customers costing you?
• Customer lifetime value goes hand in hand with another important metric –
CAC (customer acquisition cost). That’s the money you invest in attracting a new customer,
including advertising, marketing, special offers and so on. Customer lifetime value only really
makes sense if you also take the customer acquisition cost into account.
• For example, if the customer lifetime value of an average coffee shop customer is $1,000 and
the customer acquisition cost is more than $1,000 (using advertising, marketing, offers, etc.)
the coffee chain could be losing money unless it pares back its customer acquisition costs.
• Another factor in the equation is Cost to Serve. This is part of the cost of doing business, and it
involves everything you do to get the product or service into the customer’s hands and doing
what they need it to do. For example, logistics, overheads in your physical location, contact
centre costs and so on.
• Breaking this down by customer can help you understand these costs on a granular level, and
dig into details like whether your customers with a higher customer lifetime value cost the
same as the low ones, and whether some customers are more expensive than others. If the
cost of serving existing customers becomes too high, you may be making a loss despite their
seemingly high customer lifetime value.

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• Average revenue per user (ARPU)
Average revenue per user (ARPU) is a measure of the revenue generated each month from each
user.

• Average revenue per user (ARPU) is calculated by dividing the total MRR by the total number
of customers.
• ARPU gives you a bird’s-eye view into how well your company is actually doing. The higher
your ARPU, the better the chance that the company is able to extract more cash in the
future. ARPU also reveals the relative value of your product—if you have a high ARPU relative
to the revenue of the company, you know you have a product that's driving a better value
ratio.
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4. Customer acquisition cost (CAC) and lifetime value (LTV)
• Customer lifetime value (LTV) and customer acquisition costs (CAC) go hand-in-hand when it
comes to pricing analytics. You want to spend the right amount to drive new customers to your
service without jeopardizing the revenue from that customer. This is known as the LTV/CAC ratio,
and it's the "god metric" of many successful SaaS companies.

• Lifetime value needs to remain higher than acquisition costs for a company to be sustainable.
• Calculating CAC and LTV for each customer persona will help you understand your buyers even
more, letting you make more informed decisions about your pricing strategy.
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• Customer Lifetime Value Formula

• Here is the formula for customer lifetime value:

CLV = Average Transaction Size x Number of Transactions x Retention Period

• Each of these inputs acts as a lever you can pull to grow your CLV. However, every move
your business makes may have unintended consequences that impact CLV. For example, a
price increase may improve your average transaction size, but it could push customers to
shop less often or look for lower-cost alternatives.
• Experienced marketers familiar with the four Ps of marketing — product, place, price and
promotion — have a strong understanding of how marketing efforts directly influence
customer lifetime value.

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• Customer Lifetime Value Examples
• Coffee shop
• A coffee shop is a perfect starting example for CLV, as it is easy to
understand even if you don’t have an extensive business background. Let’s
say a local coffee chain with three locations has an average sale of $4. The
typical customer is a local worker who visits two times per week, 50 weeks
per year, over an average of five years.
• CLV = $4 (average sale) x 100 (annual visits) x 5 (years) = $2,000
• Car dealership
• A car dealership has a much higher average sale amount with a lower
purchase volume. In this example, we'll assume someone buys a new car
every five years for $30,000. Customers are loyal to this brand and tend to
keep buying from it for 15 years.
• CLV = $30,000 (average sale) x .2 (annual purchases) x 15 (years) =
$90,000
• Software as a Service (SaaS) subscription
• For the last example, let’s assume an online video streaming service has
multiple price plans, but the average customer spends $17 per month.
Customers typically subscribe for three and a half years and use automatic
monthly payments. 11
References
• Text Books:-
1. Grigsby, Mike., Marketing Analytics, Kogan Page, 1st Edition, 2015
2. Winston, Wayne, Marketing Analytics, Wiley, 1st Edition.
3. Venkatesan, Rajkumar; Farris Paul; Wilcox Ronald, Cutting Edge Marketing Analytics, FT Press,
1st Edition, 2015.
4. Grigsby, Mike, Advanced Customer Analytics, Kogan Page, 1st Edition, 2016.

• Reference Books:-
1. Halligan, Bryan., Shah, Dharmesh., Inbound Marketing, John Wiley, 1 st Edition. 2016.
2. Sauro, Jeff., Customer Analytics for Dummies, John Wiley 1st Edition, 2017.
THANK YOU
For queries
Email: parveen.e14565@cumail.com