Lecture 3: Marketing Management

Part 1: Customer Lifetime Value and Customer Equity

Customer lifetime value (CLV) describes the net present value of the stream of future profits expected over the
customer’s lifetime purchases. The company must subtract from its expected revenues the expected costs of
attracting, selling, and servicing the account of that customer, applying the appropriate discount rate (say, between
10 percent and 20 percent, depending on cost of capital and risk attitudes). Lifetime value calculations for a product
or service can add up to tens of thousands of dollars or even into six figures.47 Many methods exist to measure CLV.
CLV calculations provide a formal quantitative framework for planning customer investment and help marketers
adopt a long-term perspective. One challenge, however, is to arrive at reliable cost and revenue estimates. Marketers
who use CLV concepts must also consider the short-term, brand-building marketing activities that help increase
customer loyalty.

Some Definitions of Customer lifetime value is

Ways to Improve CLV
There are many different strategies companies can adopt to boost their CLV. Here are some
1. Customer Loyalty or Rewards Programs
Customer loyalty programs keep customers engaged and reward frequent purchases. Airline frequent flyer programs
and restaurant punch cards are popular examples. Incentivizing customers to return can increase purchase frequency
and the amount of time a customer buys from a brand.
2. Customer Experience
Your website, storefront, call center and other touchpoints are all part of the customer experience. If customers enjoy
a smooth, low-stress shopping experience every time, they are more likely to return for repeat business.
3. Improve Customer Onboarding
Some customers buy a product or service from a business and don't know what to do next. Successful businesses
chart a path for their customer relationships over time. Turning a one-time customer into a source of recurring
revenue is essential for growth in many industries.
4. Customer Engagement
Businesses that actively monitor all interactions between the company and their customers can identify ways to
improve the customer experience and customer loyalty. This should span channels like advertising, customer support
and sales.
5. Improved Customer Service
Bad customer service is a quick way to see your CLV quickly fall, as customers leave for competitors. Focusing on
making every customer service interaction a positive one will further enhance customer loyalty. CRM systems and
dedicated customer service platforms bring these interactions to one central location for streamlined management.
6. Customer Relationship Management
Businesses need to understand their relationships and communication history with customers across sales, customer
service and marketing. ERP and CRM systems help track and enhance these relationships over time by creating a
seamless flow of information across the entire customer lifecycle — from lead all the way through opportunity, sales
order, fulfillment, renewal, upsell and support.
7. Customer Feedback Loop
If a customer does have a bad experience, it shouldn't go unresolved. In addition to relying on customer service to
fix the issue, businesses should continuously solicit customer feedback to enhance the customer experience. Regular
product or service iterations and fixes can resolve problem areas, helping to improve customer satisfaction.
8. Invest in Technology & Software
Technology can automate processes and track and centralize much of your business data. Some companies rely on
basic tools like email, spreadsheets and contact databases to manage all this information, but it’s much easier to use
proven, packaged software suites to handle these functions. Your customers will notice the difference.
9. Upsell and Cross-Sell
It's often easier to reengage or upsell an existing customer than bring in a new one. Upselling and cross-selling are
strategies designed to encourage customers to buy more expensive or multiple products or services at once instead of
a lower-cost option.
10. Increase Pricing
When done correctly, a price increase can directly increase CLV. Just take care to avoid scaring off customers with
dramatic price increases. Also, consider competitor pricing when determining your own. By focusing on value and
giving customers something they can’t get elsewhere, you may be able to increase pricing without losing customers.
11. Social Media
One of the best places to get your customers' attention is to reach them in places where they already spend time.
Social media platforms like Facebook, Instagram, Twitter and TikTok are meaningful channels to both advertise and
interact with customers.
12. Simple Purchasing Experiences
Cart abandonment rate is a metric used by online businesses to track how many customers start shopping but leave
before completing the checkout process. This can also extend to in-person buying experiences where excessive
options and packaging can turn customers off. Building a simple purchase experience will help you capture every
possible sale. Forward-looking businesses use strategies like A/B testing to find out what works best.
13. Make Returns Easy
When a customer isn’t happy with their product or service, making returns and exchanges difficult may cost you a
customer for good. A painless returns process makes it more likely a customer will come back and give your product
or service another try.
14. Targeted Content
Content marketing is a strategy used to educate or entertain your target customers, usually designed to build up
brand trust and loyalty. Blog posts, e-books videos, podcasts and other media are popular forms of targeted content
that can speak to segments of your audience.

Customer Equity: Customer equity is the total combined customer lifetime values of all of the company’s
customers. In other words, customer equity is defined as the sum of the existing and future customers’ lifetime
value. Long story short, customer equity is the estimation of how much money you can make out of maintaining a
buy-sell relationship with a client. To calculate customer equity, you have to:
> Determine how much money you spend to acquire a new customer.
> Determine how much your company spends on customer retention.
> Calculate how much your client spends every year.
> Determine the amount of money you receive from each customer.
> List the average customer’s cash flow for a certain period.
> Separate each year’s cash flow.
> Add up the present values of all cash flows throughout the specified period.

In short, calculate the CLV of each customer, and add them together to get Customer Equity. To increase customer
lifetime value, focus on the following things:
> Appreciate your clients. Reward them from time to time to show respect for their loyalty.
> Focus on quality. People will buy products at high prices if they believe they’re good.
> Customer service is more important than you think. People encounter problems all the time, and they seek
customer service to solve them efficiently.
> USP (Unique Selling Propositions). Companies stand out because they provide something their competitors don’t.
> Implement software like REVEAL to understand visitors’ behavior and create a loyal customer base.

Part-2: Product definition and Market Definition of Business

Companies often define themselves in terms of products: They are in the “auto business” or the “clothing business.”
Market definitions of a business, however, describe the business as a customer satisfying process. Products are
transient; basic needs and customer groups endure forever. Transportation is a need: the horse and carriage,
automobile, railroad, airline, ship, and truck are products that meet that need. Market definition can also be of two
types: target market definition and strategic market definition.

A target market definition tends to focus on selling a product or service to a current market. Pepsi could define its
target market as everyone who drinks carbonated soft drinks, and competitors would therefore be other carbonated
soft drink companies.

A strategic market definition, however, also focuses on the potential market. If Pepsi considered everyone who
might drink something to quench their thirst, its competition would include noncarbonated soft drinks, bottled water,
fruit juices, tea, and coffee. To better compete, Pepsi might decide to sell additional beverages with promising
growth rates.

A business can define itself in terms of three dimensions: customer groups, customer needs, and technology.
Consider a small company that defines its business as designing incandescent lighting. systems for television
studios. Its customer group is television studios; the customer need is lighting; the technology is incandescent
lighting. The company might want to expand to make lighting for homes, factories, and offices, or it could supply
other services television studios need, such as heating, ventilation, or air conditioning. It could design other lighting
technologies for television studios, such as infrared or ultraviolet lighting or perhaps environmentally friendly
“green” fluorescent bulbs.

Part 3: BCG Matrix

Once it has defined SBUs, management must decide how to allocate corporate resources to each. Several portfolio-
planning models provide ways to make investment decisions. One model is BCG’s Growth-Share Matrix. it uses
relative market share and annual rate of market growth as criteria to make investment decisions, classifying SBUs as
dogs, cash cows, question marks, and stars. To develop BCG matrix, first we need to identify SBUs- An SBU has
three characteristics:
1. It is a single business, or a collection of related businesses, that can be planned separately from the rest of the
company.
2. It has its own set of competitors.
3. It has a manager responsible for strategic planning and profit performance, who controls most of the factors
affecting profit.

Then we go to develop BCG Matrix.

Real life BCG Matrix (summary version)