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Life Time Value Analysis

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.

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Life Time Value Analysis

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  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 = (1+I)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

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