customer lifetime value

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A technique for analysing all the potential purchase values from a single customer over the lifetime of a relationship with a supplier or service provider. This moves the focus away from looking at customers in terms of single purchasing transactions and, equally, gives an assessment of the cost of losing a potentially lifetime customer. Lifetime value calculations depend upon a thorough understanding for the target customers' life cycles because customer behaviour changes over time. Even though a transaction, or ‘snapshot’ approach to customer value behaviour can be modelled at a given point in time, it is far more powerful to look at the total value over a time period. The old ways of mass marketing were predicated on treating all customers the same—and consequently offering the same price and promotions to everyone. When a sale or promotion is launched, everyone gets the sale price—loyal customers and occasional transaction buyers. New techniques of marketing, notably the use of customer research and databases, have caused a more sophisticated approach to customer targeting. For example, some retail outlets are now issuing their customers with proprietary shopping cards and rewarding them for using them. The cards then become the basis of the store's customer database. With the database set up, the retailers can ensure that different customers receive different offers. Occasional, unknown customers pay full price. Loyal, regular customers pay a lower price on certain merchandise, or on all merchandise. Furthermore, the loyal customers are made aware that they are the favoured. They are treated like gold card customers on major airlines. Retailers have discovered that they can modify customer behaviour by appropriate application of rewards. Customer lifetime value stresses that existing customers should be encouraged to spend more with the same supplier over a longer lifetime. This is different to the more traditional approach of taking customers away from competitors. Marketers using lifetime value approaches to customers tend to reduce their advertising outlay because they know the low profitability and low loyalty of the promiscuous shoppers who are attracted to their stores by heavy advertising. This leads to an approach in which low margin offers are not made to unprofitable customers. The best customers get offered the most aggressive pricing and special promotions and are treated more specially.

Subjects: Marketing.

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