Understanding Customer Value and Lifetime Value Metrics

Economic Value

Monetary savings at purchase or product lifecycle. Tangible monetary savings at the time of purchase (a cup of coffee) or over the life cycleof a product (a car) Total cost of ownership Light Bulbs

Total Cost of Ownership

Overall cost incurred from owning a product.

Functional Value

Value from features or attributes of a product.

Compensatory Model

High attribute value offsets low attribute value. consumers evaluate choices based on various attributes and allow positive attributes to compensate for negative ones. This process means that if a product or option has a high score on one attribute, it can offset lower scores on another..

Experiential Value

Intangible benefits from psychological or emotional aspects.

Social Value

Value derived from social interactions and relationships.

Customer Lifetime Value (CLV)

Total revenue expected from a customer over time.

Net Promoter Score (NPS)

Measures customer loyalty and likelihood to recommend.

Social Benefits

Network Effects: More users make a platform more valuable.

Others’ Likes Affect Preference: Popular posts influence our interests.

Preference Formation: We start to like what our friends like.

Recognition for Contributing: We enjoy being noticed for our posts.

Social Capital: Building status and influence in a social network.

Social Relationships: Connecting and bonding with others.

non-economic value

Functional Value: The practical usefulness or utility of a product, service, or experience. For example, a tool that makes daily tasks easier holds functional value.

Psychological Value: The emotional or mental benefits gained, like happiness, pride, or status. For instance, owning a luxury item may bring a sense of accomplishment or belonging.

Non-Rational Factors: Sometimes, non-economic value is driven by factors that aren't logical or strictly rational. These could include personal biases, habits, or sentimental attachments, where decisions are based on feelings rather than reason.

Customer Satisfaction (CSAT)

Surveys rating customer satisfaction with products.

Customer Retention Rate

Percentage of customers continuing doing business over time.

Customer Effort Score (CES)

Ease of customer interaction and issue resolution.

Revenue per Customer

Average revenue generated from each customer.

Customer Acquisition Cost (CAC)

Cost incurred to acquire a new customer.

CLV/CAC Ratio

Healthy ratio indicates profitable customer acquisition.

Descriptive Model

Calculates CLV using historical consumer data.

Predictive Model

Uses historical patterns to forecast future CLV.

Operative Model

Automatically predicts CLV using machine learning.

CLV Formula

CLV = m.r/(1+d-r), where m = margin.

Retention Rate

Percentage of customers retained over time.

Discount Rate

Cost of capital expressed as a percentage.

Market Investment Payoff

Required customer acquisition to justify marketing spend.

Retention Rate Increase Cost

Maximum spend to improve retention from 80% to 90%.

Fire Customers

Evaluate if certain customers are unprofitable.

limitations of using the Customer Lifetime Value (CLV) and Customer Acquisition

Ignoring Unhappy Customers: It’s hard to measure the real cost of unhappy customers, like bad reviews or lost sales from negative word-of-mouth.

Assuming Customers Stay the Same: Customers’ needs and spending habits change over time, but CLV/CAC often treats them as static, missing these changes.

Data Collection Challenges: Getting all the needed data and using it correctly can be difficult and time-consuming.

Limited Data Types:

Transaction Data: Only includes basic purchase info (like what and when they bought, payment method, delivery).

Demographic Data: Summarizes customers by general info (like age, gender, job, location).

Marketing Data: Only captures basic marketing interactions (like clicks or searches), missing a full picture.

Machine Learning Could Help: Machine learning models might improve the accuracy of CLV/CAC by identifying patterns and predicting customer behavior better over time.

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