aim is to reduce costs in communications and if they do not remain as customers this is
acceptable. Some bronze customers such as group C may have potential for growth so
for these the strategy is to extend their purchases. Silver customers are targeted with cus-
tomer extension offers and gold customers are extended where possible although they
have relatively little growth potential. Platinum customers are the best customers, so it is
important to understand the communication preferences of these customers and to not
over-communicate unless there is evidence that they may defect.
To illustrate another application of LTV and how it is calculated, take a look at the last
example in Activity 6.1.APPROACHES TO IMPLEMENTING E-CRMActivity 6.1 Charity uses lifetime value modelling to assess returns from new
e-CRM system
A charity is considering implementing a new e-mail marketing system to increase donations from
its donors. The charity’s main role is as a relief agency which aims to reduce poverty through
providing aid, particularly to the regions that need it most. Currently, its only e-mail activity is a
monthly e-newsletter received by its 200,000 subscribers which features its current campaigns
and appeals. It hopes to increase donations by using a more targeted approach to increase
donations based on previous customer behaviour. The e-mail system will integrate with the
donor database which contains information on customer profiles and previous donations.
The company is considering three solutions which will cost between £50,000 and £100,000 in
the first year. In the charity, all such investments are assessed using lifetime value modelling.
Table 6.3 is a lifetime value model showing customer value derived from using the current
system and marketing activities.A Donors– this is the number of initial donors. It declines each year dependent on the
retention rate (row B).
B Retention rate– in lifetime value modelling it is usually found to increase year-on-year, since
customers who stay loyal are more likely to remain loyal.
C Donations per annum – likewise, the charity finds that the average contributions per year
increase through time within this group of customers.
D Total donations– calculated through multiplying rows B and C.
E Net profit (at 20% margin) – LTV modelling is based on profit contributed by this group of
customers, row D is multiplied by 0.2.Table 6.3Lifetime value model for customer base for current systemYear 1 Year 2 Year 3 Year 4 Year 5
A Donors 100,000 50,000 27,500 16,500 10,725
B Retention 50% 55% 60% 65% 70%
C Donations £100 £120 £140 £160 £180
per annum
D Total donations £10,000,000 £6,000,000 £3,850,000 £2,640,000 £1,930,500
E Net profit £2,000,000.0 £1,200,000.0 £770,000.0 £528,000.0 £386,100.0
(at 20% margin)
F Discount rate 1 0.86 0.7396 0.636 0.547
G NPV contribution £2,000,000.0 £1,032,000.0 £569,492.0 £335,808.0 £211,196.7
H Cumulative NPV £2,000,000.0 £3,032,000.0 £3,601,492.0 £3,937,300.0 £4,148,496.7
contribution
I Lifetime value at £20.0 £30.3 £36.0 £39.4 £41.5
net present value