The Long term value of a Customer (LTV Theory)
Customer lifetime value
Customer lifetime value (CLV):
The present value of the future cash flows attributed to the customer during his/her entire relationship with the company.
Customer lifetime value has intuitive appeal as a marketing concept, because in theory it represents exactly how much each customer is worth in monetary terms, and therefore exactly how much a marketing department should be willing to spend to acquire each customer, especially in direct response marketing.
In marketing, customer lifetime value (CLV) (or often CLTV), lifetime customer value (LCV), or user lifetime value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy.
Customer lifetime value (CLV) can also be defined as the dollar value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship. Customer lifetime value is an important concept in that it encourages firms to shift their focus from quarterly profits to the long-term health of their customer relationships.
Recently in a class I asked a PNG participant to advise me the fare from their Port to Australia, and their typical flights pattern. A real example. She said K 6,500 per trip approx. in Business Class. The following example is conservative by the way. It could be much more in different categories.
The true Value of a customer formula
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Average J/CL fare to Australia as stated
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K6,500
|
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Average Number of trips in a month
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6
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Line 1 X Line 2 (month)
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39,000
|
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For year (10 months)
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390,000
|
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Related sales P/A (cargo, etc.)
|
22,000
|
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Family travel P/A (wife and 4 kids)
|
40,000
|
|
Annual Average asset value - Subtotal for year
|
452,000
|
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Referrals to colleagues and friends (10 people X K6, 000)
|
60,000
|
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S/T = per annum
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512,000
|
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Typical customer longevity is (10 yrs.)
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|
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True value of this customer (so far!!)
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K5, 120, 000
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Again, this is conservative. This business person does bring from Asia business partners a few times a year. Further, sometimes the cargo is more, and sometimes the family travel more.
So, next time you meet a customer, remember these figures and how important it is to serve and keep your customers.
“It costs 6 times more to attract a new customer as it does to retain an existing one. “
“A happy customer will tell 4/5 others about their experience, an unhappy customer will tell 9/10 or many more, about their bad experience!” (remember social media!)
When you see a customer in Business Class for instance who paid ~K 6,500, it is not just 6,500 he/she represents but much more (e.g. K 5, 120,000) they are worth to us. The True Value of a customer is much more! We’ve got to RETAIN each and every customer we have!
