Marketing 3301

Customer Lifetime Value

Before start this worksheet, watch Chapter 10 Marketing Research Part 2. Lecture Video and understand the concept of CLV.

Customer Lifetime Value Definitions:

The amount of profit your company can expect to generate from a customer, for the time the person (or company) remains a customer (e.g., x number of years). At its core, CLV is the present value of all future streams of profits that an individual customer generates over the life of his or her business with the firm.-Harvard Business Review

In marketing, customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or life-time value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer.-Wikipedia

Generally formulas involve:

(Gross profit per purchase) x (frequency of purchase/year) x (duration of the relationship) for total gross profit generated per average customer in their lifetime- (or duration of relationship).

LESS

The costs acquire and serve the customer over the duration of the relationship

There are many more complicated formulas that include, churn, discounted cash flows, and acquisition costs. It should be customized for the business scenario. Todays data rich business environment allows us to closely analyze our relationships with customers to optimize, customize, and segment user groups for enhanced program development. For this exercise we will only utilize the costs of the program (10%) in the Post-Reward CLV.

Starbucks Case Description

This scenario looks at the impact of a loyalty program on CLV. Usually we would expect a loyalty or rewards program to increase frequency of purchase, and or average spend per purchase. The increase in gross margin delivered by the average customer at the new spend and frequency numbers will grow estimates of CLV. The question is how much? What levels do we need to grow for the program to be viable? Estimated CLV is a good measurement to determine the long-term viability of the program.

Today we will look at the average CLV of a Starbucks Customer prior to the Starbucks Rewards Program. We will then look at the change in purchase behavior after the program inception, and the associated program costs. We can determine the success of the program.

You will need to calculate CLV pre and post, less the program costs for the post group.

	Pre-Rewards	Post-Rewards
Spending/Customer	$ 5.90	$5.95
Cost of Goods	25%	25%
Frequency of Visit/Week	4.2 times/week	4.9 times/week
Cost of Reward Program	NA (PRE REWARDS)	9.5% discount, plus .5 administrative, total of 10%

DO NOT provide just answer. Show your work and process. Providing only answers will carry 50% deduction of your score.

1. Calculate the Average Customer CLV PRIOR to the Rewards Program, assuming the customer relationship is assumed to be 25 years. Do Not provide just answer. Show your work.

2. Utilizing the process you used prior, determine the CLV of the Post Reward Program customer. (Points are generated at the 2 points per dollar spent, and a free product is earned every 125 points. For every $62.50 spent, the average customer redeems $5.95 (or 9.5%) This reward system has administrative costs of .5%.) Total costs are estimated at 10% . Do Not provide just answer. Show your work.

3. What if the frequency of visit remains 4.2, how much increase in spending/customer is needed to make the reward program profitable? Do Not provide just answer. Show your work.

4. If the spending/customer grows to $6.00, how much growth in frequency is needed to make the reward program profitable?Do Not provide just answer. Show your work.