HBR's Go to Market Tools - Customer Lifetime Value

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This article concerns: http://hbr.org/product/hbr-s-go-to-market-tools-customer-lifetime-value/an/GTM3TL-HTM-ENG

HBR's Go to Market Tools: Customer Lifetime Value

HBR's Go to Market Tools: Customer Lifetime Value is an English Web based HTML interactive program that calculates your customers’ lifetime value (CLV) and helps you figure out how to improve it. Professors Jill Avery (Harvard Business School) and Thomas Steenburgh (Darden School of Business) designed the tool to help you focus your marketing and product development efforts on your most valuable customers.

Your Situation: Has your marketing budget been slashed? Need to figure out the best place to invest your time and effort to reach your growth target?

Your Solution: HBR's Go to Market Tool helps calculate your customer's lifetime value, allowing you to prioritize your marketing and product development resources on the customers that will provide the biggest returns. This tool allows you to play around with the levers that determine a customer's lifetime value - providing insight into how to maximize the value each type of customer delivers to your company. The relationships a company has with its customers are one of its most valuable assets, and understanding the value of those customer relationships is key to managing them well over time. But not all customers are created equally, and figuring out how much value each customer adds to your bottom line allows you to be most efficient with your marketing and product development investment. Enter your own data into HBR's Customer Lifetime Value tool to figure out:

  • How much to spend to acquire a new customer, or retain an existing one
  • What levers you could pull to increase a customer's lifetime value, and by how much
  • Which customer segments you should target to maximize profits
  • Which customer segments are dragging down your profitability
  • How to increase the value of the customers you already have

Includes:

  • Introductory video
    • 1 minute, 18 seconds long
    • only available in-product, online
  • Tutorial
    • walks you through the concepts, data gathering, calculations, and analysis that will help you determine which customers are worth your attention, and which you should ignore
    • only available in-product, online
  • Calculate your CLV tool
    • provides a systematic way to determine which of your customers are the most valuable, based on your real customer data
    • only available in-product, online
  • Excel version of the tool
    • downloadable
    • available permanently (from saved local copy)
  • PowerPoint
    • pre-designed
    • fully customizable
    • results from CLV tool export into PPT
    • presentation to share your results with your colleagues
    • available permanently (from saved local copy)

Navigate

When you launch Customer Lifetime Value, you will be on the 'Welcome' screen. You can use the menu links at the top of the screen as well as the buttons in other areas of the screen to navigate. Click the play icon to watch the introductory video. Click the 'Worksheet' button in the 'Excel Worksheet' section to download the Excel version of the CLV tool.

Click on 'Tutorial' in the menu at the top of the screen or the 'Tutorial' button in the 'Walk Through the Tutorial' section to go through the training tutorial.

Clicking on the 'Tutorial' links on the 'Welcome' page will bring you to a tutorial explaining how to use the tool. Click on the arrows at either end of the Tutorial menu, or click on the specific page names (Segmentation, Profit, Onetime Costs, Retention, Time Value, CLV) to navigate through the tutorial pages.

Click on 'My Projects' in the top menu or the 'Tool' button under 'Calculate your CLV' to begin using the tool with your company's data.

The first time you click on the 'My Projects' or 'Tool' links on the Welcome page, the page will display a 'Get Started' button in the upper right as well as instructions in the center of the page how to proceed. Click the 'Welcome', 'Tutorial' or 'Glossary' links in the menu bar to navigate away from this page.

Clicking 'Get Started' will give you a screen on which to enter you company's data and click the 'Crunch' button to calculate the Customer Lifetime Value.

After clicking 'Crunch' to calculate the Customer Lifetime Value, you can click the 'Save', 'Save & New Segment' or 'Delete' links, depending on your intended use of the data.

You may click 'Crunch' and save the results multiple times.

Clicking on the 'My Results' tab will give you graphical representations of your crunched data.

At the bottom of the 'My Results' tab is a 'Save a PPT' button allowing you to export your results into PowerPoint.

The 'Now What?' tab gives you next steps for how to handle your new understanding of your customers and their lifetime value.

Click on the 'Glossary' link in the top menu at any time to access the full glossary of terms relevant to the tool.


ACQUISITION COSTS

Typically, you spend marketing and advertising dollars to acquire a new customer. In the Customer Lifetime Value tool, acquisition costs represent the average onetime costs of acquiring one new customer.

CHURN RATE

The percentage of customers who do not continue their relationship with your company over a given period (one year).

CUSTOMER LIFETIME VALUE (CLV)

The amount of profit your company can expect to generate from a customer, for the time the person (or company) remains a customer (X number of years).

The relative CLV of your customers determines which types of customers are more or less profitable to you. This value helps you decide which customers should be the focus of your marketing and product development efforts for customer acquisition and retention—and which customers you should ignore.

DISCOUNT RATE

When you calculate a CLV, you assume an average annual revenue from a customer for a certain number of years. But the revenue you receive in the future is less valuable than it is today. Including your firm’s discount rate in the CLV equation calculates the present value of that future revenue.

PROFIT

The amount of money your company earns after paying all of its expenses. Profit equals revenue minus costs.

RETENTION RATE

The percentage of customers who continue their relationship with your company over a given period (one year). Retention rate equals 1 minus churn rate.

REVENUE

Revenue equals the number of products or services purchased, multiplied by the price received by your company.

SEGMENT

A subset of your current market. Each segment represents a distinct group of customers who share some characteristic: for example, demographics (women worldwide older than age 22), psychographics (customers who value eating healthy food), or behavior (customers who buy salty snacks at least once a week).

SEGMENT CUSTOMER LIFETIME VALUE (SCLV)

The amount of profit your company can expect to generate from an entire customer segment, for the time that the segment remains your customers (X number of years).

The SCLV takes into account the CLV of an average customer within the segment and the number of customers in the segment.

SEGMENT SIZE

The number of customers within a given customer segment.

VARIABLE COSTS

The cost of producing an incremental unit of a good or service. These costs may vary as the quantity your company produces and sells changes.

PURCHASING YEARS

The number of years you expect a customer to continue buying from your company.

Do I have to complete the Tutorial?

No, you do not need to complete the Tutorial. It is simply available as an optional resource. 

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