Customer lifetime value is a very relevant and important concept in modern marketing. With Philip Kotler and other gurus of marketing propagating the use of this tool, customer lifetime value has become an increasingly critical strategic tool for corporations around the globe.
What exactly is customer lifetime value? It is an easy concept to grasp and one that usually helps companies design their strategy. It is the value that a customer is likely to give a company over a lifetime based on his yearly purchase rate and monetary value of the same. The following problem and its solution will illustrate the concept more clearly:
MJ Jewelers want to calculate the customer lifetime value of an average customer of their products. They know that usually a customer would spend $300 on one trip and such trips are around 3 on average. Based on this data the customer lifetime value will be as follows:
Expected years of purchase
Average yearly purchases
Amount spent on each purchase: $300
Customer lifetime value is thus: 300*3*30= $27,000
The second question deals with the strategy that this firm should adopt. Should it go for retention or should it aim for higher frequency of purchase. This question is pertinent because most firms would definitely want to see their customers visiting them more often but at the same time, retention of customers is equally important in order not to lose the old customer base.
Based on lifetime value, the firm can try to increase it from 3 to 5 purchases a year and still retain its customers. This can be done by offering new products and also attracting new customers to the shop with greater lifetime value.
Offering new products:
By offering new products and better deals, the company can increase frequency of purchase from its existing customer base. If an average regular customer increases his purchases by even one single purchase, this would give them this firm an additional $9,000 more from each customer. Translated into the monetary benefits over a lifetime of each and every customer, this single increase might prove beneficial for the firm.
Attracting younger customers:
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