Life time value of a customer: Concept and Application
In today’s dynamic business world of changing face of customers is a challenge to reckon with. Companies are increasingly faced with the task of keeping track of their customers, maintaining consistency within the organization and satisfying needs so as to enjoy continued patronage. It’s requirement to build and maintain successful individual-level customer relationships in order to maximize profitability and ensure customer loyalty for future profitability. Relationships with customers are not always secure. It is difficult to predict for how long the customer is going to stay with a firm in a non-contractual setting. Customer management strategies are aimed at
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The concept of the lifetime value of a customer is well established in the theory and practice of database marketing. The lifetime value of a Customer, defined to be the expected present value of the net cash flows from the firm’s relationship with the customer over his or her lifetime, is often used as an upper limit on spending to acquire the customer. If the expected cash flows from the relationship with the acquired customer have a present value of $100, then the firm should spend no more than $100 to acquire that customer. The purpose of this is to examine carefully the use of customer lifetime value. While the $100 lifetime value of the acquired customer is one important factor in the acquisition decision, it need not be the only factor. In other words, sometimes the acquisition of a customer affects the lifetime values of the firm’s other customers and prospects. In those situations, the firm must account for these higher order effects when setting a limit on acquisition spending.
The concept of the lifetime value (LTV) of a customer is an important one for database marketers. The cash flows typically include revenues, product and servicing costs, and remarketing costs. Lifetime value (LTV) is perhaps most commonly used to help firms decide how much to spend to acquire new customers. For the most