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Case Study 1: CLV (Customer Lifetime Value)

The document discusses calculating customer lifetime value (CLV) to measure a company's long-term success. It provides an example of a catalog company, Flintex, that is considering acquiring new customers either through random mailings or buying customer names from a broker. Flintex analyzes purchase patterns to estimate that random mailings yield a 1% response rate while selectively bought names yield 4%. It also analyzes customer segments of frequent and occasional buyers over their lifetime with the company based on purchase frequency and retention rates to calculate acquisition costs, break-even time, and total expected profit per customer.

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328 views2 pages

Case Study 1: CLV (Customer Lifetime Value)

The document discusses calculating customer lifetime value (CLV) to measure a company's long-term success. It provides an example of a catalog company, Flintex, that is considering acquiring new customers either through random mailings or buying customer names from a broker. Flintex analyzes purchase patterns to estimate that random mailings yield a 1% response rate while selectively bought names yield 4%. It also analyzes customer segments of frequent and occasional buyers over their lifetime with the company based on purchase frequency and retention rates to calculate acquisition costs, break-even time, and total expected profit per customer.

Uploaded by

kejal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Case Study 1: CLV (Customer Lifetime Value)

How do we estimate whether a company is doing well or not? Usually by looking at operating metrics like
sales, revenues, and profit margin and then comparing these figures to your annual projections, historical
numbers, or competitors in the same industry. But what metrics can you use to determine your company’s
success in the long term? The digital revolution has given rise to a host of technologies that are
transforming marketing practices. Powerful databases and electronic data networks are allowing
companies to collect concise information about the customers and their buying patterns more effectively
and efficiently than ever before. One of the most useful calculations that a company can do to measure
long-term success is customer lifetime value or CLV. As the term implies, the customer lifetime value
represents the total amount of money that a particular customer is likely to spend over his or her lifetime.
Let’s try to calculate and understand the concept with the following example of a fashion goods company.

A direct catalog based fashion goods company - “Flintex” is contemplating whether or not to attract new
customers using names purchased from a broker agency or by randomly sending out catalogs. The cost of
sending a catalog (which includes production and mailing) is $0.5. From experience, the company
anticipates the response rate (the percentage of individuals who receive the catalog and purchase from it,
hence becoming “current customers”) from a random mailing to be 1%. By analysing the buying behaviour
and demographics of current customers, Flintex estimates it can rent names selectively from the broker to
achieve a response rate of 4%. The listing broker has set a price of $0.2 for each name.

Flintex makes changes to the product line four times a year. Historical data has shown that one can
roughly segment the market of current customers after one year into frequent buyers, who purchase twice
a year with an average order size of $50, and occasional buyers, who purchase only once a year with an
average order size of $80. The retention rate (percentage of customers who continue to make a purchase
with the company in the next period) is 75% for frequent buyers and 50% for occasional buyers. Gross
margins are 20% of sales and include all expenses aside from the cost of sending out catalogs. In the first
year, the retailer sends a catalog every month to all acquired customers. Based on first-year purchase
patterns, frequent buyers continue to receive 12 catalogs a year, while occasional buyers receive only 4.
Flintex wishes to calculate the acquisition costs associated with each source of potential customers. It is
also interested in knowing how many years it would take to recoup the initial costs of acquisition. Besides
knowing how many years it will take to start making profits, it is obviously of interest for the Flintex to
establish the total expected profit stream arising from each customer over the lifetime of her relationship
with the company.

Q1. What is the cost of acquiring each customer if the catalog is sent to the random list of customers and if
it is sent to the selected list of customers bought from the broker agency?

Q2. How many years it would take to recover the initial costs of acquisition for both occasional buyers and
frequent buyers?

Q3. What is the yearly revenue stream both occasional and frequent buyers if future profits are
discounted? For analysis, assume an interest rate of 10% for purposes of discounting future revenue
streams. Do the calculations for five years for both the segments.

Q4. What is the customer lifetime value (CLV) of an occasional buyer versus a frequent buyer? For analysis,
assume the relationship with a customer is valuable till the point

a) discounted future profits become less than $1


b) survival rate of customers goes below 10%.

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