Customer Lifetime Value
Overview
The Customer Lifetime Value (LTV)
represents the total discounted value of having given customer to the firm. This includes all the value that accrues to
the firm over the liftime of the customer. This inherently means that for most firms and customers, the LTV is not
known for certain, that is, it is random to some degree, and many times cant be measured well due to the future nature
of the value.
Measuring LTV
Measuring LTV is a tricky business. Typically this is due to the future nature of customer value. That is, a customer today
has a value that accrues to the firm due to revenues generated from the customer relationship that occurs in the future.
Even if the
firm has a single subscription product, estimating value is still hard. While it is probably safe to assume that the
firm could reasonably forecast the subscription price, because it controls that price, predicting how long a subscriber retains
the subscription can be hard to do.
All lifetime value analysis is a variant of
cash flow forecasting, that is,
customer value comes from cash flows received from the customer. Then
present value analysis is applied to determine a single lifetime
value.
The following are a list of various scenarios and techniques used to estimate lifetime value.
- Using Historical Numbers - this method does not attempt to forecast
Market Basket Analysis
Market Basket Analysis - Market basket analysis strives to understand which products
tend to be purchased together, as well as the probabilities that a consumer
will purchase additional products given the products they have already purchased. This is generally used to understand the best way
to market bundles of products and to cross-sell.
Market basket analysis is useful in two regards.
First, understanding the tendency of a customer to purchase other products given the product they have already
purchased can lead to a more accurate estimate of customer value, because it helps to understand which products
the customer is likely to buy in the future.
Secondly, market basket analysis can help to inform marketing and sales efforts directed to the given client.
