CopyrightMarketing Analysis Toolkit: Customer Lifetime Value AnalysisHarvard Business School Case 511-029Courseware # 511-702This courseware was prepared by Professors Thomas J. Steenburgh and Jill Avery (Simmons School of Management) solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright 2010 President and Fellows of Harvard College. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

IntroductionCustomer Lifetime ValueAnalysis Quantitative ToolkitThis toolkit is designed to accompany the Harvard Business School note, No. 9-511-029, entitled "Marketing Analysis Toolkit:Customer Lifetime Value Analysis".Using the CLV Excel ModelsTwo models are offered - a simple one that ignores the time value of money and a more advanced one thatincludes the time value of money. Either of the models can use years of purchasing life, churn rate, or retentionrate to calculate the customer lifetime value.There are two sections in each model: an input section and an output section. In the input section, you needto input your model assumptions, providing values for the annual contribution margin, years of purchasing life,churn rate, or retention rate, customer acquisition cost, and discount rate (advanced model only).The output section automatically calculates values for you -- do not enter anything into the yellow cells asthey contain formulas. The output section calculates the customer lifetime value. Depending on which valueyou enter, the output section calculates the years of purchasing life, churn rate, and retention rate.Once you become more comfortable with running CLV analyses, try building your own Excel models to calculate CLV.The spreadsheets entitled Table-Graph contain a data table and a graph which help illustrate what customer lifetime valuerepresents. Both the Table and the Graph automatically populate when you enter values in the input section of the Excelmodel. Do not enter or change anything in the Table or Graph.The Table shows you the Expected Contribution Margin, (Discounted Expected Contribution Margin in the advanced model)for each year of the customer's life.The Graph shows you the data from the Table represented in a bar graph, so that you can see how annual margins andacquisition costs are realized over the customer's lifetime.Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) developed this toolkit. HBS Toolkitsare developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data,or illustrations of effective or ineffective management.Copyright 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No partof this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by anymeans --electronic, mechanical, photocopying, recording or otherwise -- without the permission of Harvard Business School.

Sample ProblemCustomer Lifetime ValueAnalysis Quantitative ToolkitIntroductionFirst, try completing the sample problem below using pencil and paper. Use the mathematical formulas summarized in theIntroduction to the toolkit to solve for the answer. Then, try completing the sample probem using the Simple Prebuilt ExcelModel. In the input section, enter the data contained in the sample problem. Analyze the results that appear in theoutput section to see if they match the answer you calculated in the first step. Look at the tables and graphs that aregenerated to visualize your results.Sample ProblemTess is the development manager for the Isabelle Stewart Gardner Museum in Boston. She was in the middle of alarge campaign to raise $50 million for a building expansion project. Her development budget was tight and Tessknew that she needed to attract the right kind of donor to the campaign. She was trying to decide which type ofdonor to cultivate.Her first choice was a younger, arts active woman living in Boston. This type of woman was likely to give in smaller increments,about $500 per year, but, given her young age, could be expected to donate to the museum for the next 15 years.Her other choice was an elderly, charitably inclined, suburban woman. This type of woman gave big gifts, on average around$10,000 per year, but only could be counted on to give to the museum for 3 years.A younger woman was easier to acquire as a donor; Tess just had to invite her to a black tie event whichcost the museum $100 per person and then she would become a donor. An older woman was much moreexpensive to acquire; Tess had to personally cultivate her, with dinners, special tours with curators,and special events, which cost the museum $5,000 per person. For every donation dollar received, Tess expends $0.15in variable costs. Given her tight development budget, Tess knew she could only target one group. Who shouldshe target and why? What is the customer lifetime value of a younger woman? What is the customer lifetime valueof an older woman? If Tess has unlimited resources, should she target both types of women? Why or why not?How much should Tess be willing to spend to acquire a younger woman donor? How much should Tess be willing tospend to acquire an older woman donor?SolutionPen and Pencil SolutionIf we want to use the customer lifetime value formula, we need to know (or make assumptions for) three pieces of data:1.) annual profit per donor, 2.) the cost to acquire the donor, and 3.) either the years of purchasing life, churn rate, orretention rate.1500The sample problem provides us with information we can use to calculate annual profit per donor.Younger donors contribute $500 per year. Think of this as revenue coming into the firm. For each of thesedollars, Tess expends $0.15 in variable costs for a total of $75 per year. So, the annual profit Tess receivesfrom a younger donor is $500 - $75 = $425 per year.Older donors contribute $10,000 per year. For each of these dollars, Tess expends $0.15 in variable costs for atotal of $1,500 per year. So, the annual profit Tess receives from an older donor is $10,000 - $1,500 =$8,500 per year.The sample problem also provides us with information on the number of years customer donate: 15 for younger donorsand 3 for older donors.The sample problem also provides us with information about the acquisition cost of each type of donor: $100 foryounger donors and $5,000 for older donors.Using this data, we can use the mathematical formula to calculate the CLV of each type of donor:CLV (younger)=($425 * 15) - $100=$6,275CLV (older)=($8,500 * 3) - $5,000=$20,500So, over her lifetime of giving, a younger donor is worth $6,275 to the museum, while an older donor is worth$20,500. If her goal is to maximize CLV, then she should allocate her development budget to acquiringolder donors.If her development budget was unlimited, Tess should target both types of donors, because both have positiveCLV's. She should be willing to spend up to $6,275 to acquire a younger donor and up to $20,500 toacquire an older donor.Prebuilt Excel Model SolutionBelow is a picture of what the prebuilt model input and output sections should be for the solution. The inputs areannual contribution margin received by the firm ($425 younger/$8,500 older), years of purchasing life (15 younger,3 older), and acquisition costs ($100 younger/$5,000 older)Younger Donor Solution:Older Donor Solution:Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) developed this toolkit. HBS Toolkitsare developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data,or illustrations of effective or ineffective management.Copyright 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No partof this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by anymeans --electronic, mechanical, photocopying, recording or otherwise -- without the permission of Harvard Business School.

Simple ModelCustomer Lifetime ValueAnalysis Quantitative ToolkitThis is the SIMPLE MODEL which calculates CLV using the years of purchasing life, churn rate, or retention rate, and ignores the timevalue of money.Input SectionDirections: In this section, you must input values to run the model. Values must be inputted into all cellsthat are boxed in blue like this:in order for the model to run. The values that are in the modelcurrently are just random numbers. If you are confused about what to enter in each cell, run your mouse overthe red celltip for an explanation.Annual contribution margin$50.00Acquisition costs (AC)$20.00Please enter a value for one of the following three metrics, leaving the other two blank:Expected years of purchasing life (L)10Annual churn rate (CR)Annual retention rate (RR)Output SectionDirections: In this section, the model automatically calculates the customer lifetime value for you. It alsocalculates the years of purchasing life, the annual churn rate, and the annual retention rate which are used tocalculate CLV. Remember, do not type anything into any of the cells in the output section that are filled in yellowlike this:as they contain formulas. If you would like an explanation of the formula which is beingcalculated, run your mouse over the red celltip.Expected years of purchasing life (L)10.00Annual churn rate (CR)0.10Annual retention rate (RR)0.90Customer Lifetime Value (CLV)$480.00Analyzing Your ResultsNow that you have calculated the customer lifetime value for the customer, you are ready to assessher worth to the firm. The first thing you should look at is whether the customer generates a positiveor negative CLV. Customers with a negative CLV are not worth the firm's investment; these are customerswho cost the firm more to acquire than they are worth. Customers with a positive CLV are worthy ofinvestment; these are customers who generate more profits for the firm than the cost of acquiring them.You can also use the calculated CLV to estimate the value of a customer segment. Use the CLVcalculator to generate an average CLV for a typical customer in the segment. Then, multiply theaverage CLV of a customer by the number of customers in that segment to obtain the CLV of the entiresegment. You can use this to compare the CLV of one customer segment to another.You can also use the CLV to estimate how much to spend to acquire a customer. Put a zero in theacquisition cost box and run the model. The calculated CLV will tell you the maximum you can spend toacquire the customer.Visualizing Your ResultsUse the Table and Graph on the next spreadsheet to help you visualize your results.Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) developed this toolkit. HBS Toolkitsare developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data,or illustrations of effective or ineffective management.Copyright 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No partof this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by anymeans --electronic, mechanical, photocopying, recording or otherwise -- without the permission of Harvard Business School.

Enter the annual contribution margin received by the firm from the customer. Remember the annual contribution margin = (price per unit - variable cost per unit) * number of units sold per year. If variable costs are not known, use COGS to calculate the annual gross margin and use that to calculate CLV.Enter the expected number of years you expect to have the customer purchasing from the firm.The total value of the customer to the firm over the purchasing lifetime of the customer. Calculated by multiplying the annual contribution margin of the customer by the number of years of purchasing life, and then subtracting the cost incurred to acquire the customer.Enter the total costs the firm will expend to acquire the customer.Enter the expected percentage of customers who will leave the firm in an average year.Enter the expected percentage of customers who will remain with the firm in an average year.The years of purchasing life are either entered above or calculated by using the churn rate (L= 1/CR) or the retention rate (L = 1/(1-RR).The annual churn rate is either entered above or calculated by using the retention rate (CR = 1-RR) or the years of purchasing life (CR = 1/L).The annual retention rate is either entered above or calculated by using the churn rate (RR = 1 - CR) or the years of purchasing life (RR = 1-1/L).

Table-Graph Simple ModelCustomer Lifetime ValueAnalysis Quantitative ToolkitCustomer Lifetime Value TableThis table automatically populates based on the values you entered into the Excel Simple Model. It shows you theExpected Contribution Margin for each year of the customer's lifetime.The CLV calculation sums the expected contribution margins from each year.YearExpected Contribution MarginAcquisition Cost1$50.00-$20.002$45.003$40.504$36.455$32.816$29.527$26.578$23.919$21.5210$19.3711$17.4312$15.6913$14.1214$12.7115$11.4416$10.2917$9.2718$8.3419$7.5020$6.7521$6.0822$5.4723$4.9224$4.4325$3.99all values of t > 25$35.89CLV$480.00Customer Lifetime Value GraphThis graph automatically populates based on the values you entered into the Excel Simple Model. It shows you theprofit inflows and cost outflows the firm anticipates from the customer over her lifetime.Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) developed this toolkit. HBS Toolkitsare developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data,or illustrations of effective or ineffective management.Copyright 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No partof this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by anymeans --electronic, mechanical, photocopying, recording or otherwise -- without the permission of Harvard Business School.

Table-Graph Simple Model

Expected Annual Contribution MarginAcquisition CostsYearDollars

Advanced ModelCustomer Lifetime ValueAnalysis Quantitative ToolkitThis is the ADVANCED MODEL which calculates CLV using the years of purchasing life, churn rate, or retention rate, and includesthe time value of money.Input SectionDirections: In this section, you must input values to run the model. Values must be inputted into all cellsthat are boxed in blue like this:in order for the model to run. The values that are in the modelcurrently are just random numbers. If you are confused about what to enter in each cell, run your mouse overthe red celltip for an explanation.Annual contribution margin$50.00Firm Discount Rate per year (i)12%Acquisition costs (AC)$20.00Please enter a value for one of the following three metrics, leaving the other two blank:Years of purchasing life (L)Churn rate (CR)10%Retention rate (RR)Output SectionDirections: In this section, the model automatically calculates the customer lifetime value for you. It alsocalculates contribution margin per unit, and annual revenue, annual variable costs, and annual contributionmargin. Remember, do not type anything into any of the cells in the output section that are filled in yellowlike this:as they contain formulas. If you would like an explanation of the formula which is beingcalculated, run your mouse over the red celltip.Years of purchasing life (L)10.00Churn rate (CR)0.10Retention rate (RR)0.90Customer Lifetime Value (CLV)$234.55Note: This CLV calculation assumes 1.) the time horizon is infinite, 2.) the same margins are received every yearfrom customers, and 3.) the retention rate is constant.Analyzing Your ResultsNow that you have calculated the customer lifetime value for the customer, you are ready to assessher worth to the firm. The first thing you should look at is whether the customer generates a positiveor negative CLV. Customers with a negative CLV are not worth the firm's investment; these are customerswho cost the firm more to acquire than they are worth. Customers with a positive CLV are worthy ofinvestment; these are customers who generate more profits for the firm than the cost of acquiring them.You can also use the calculated CLV to estimate the value of a customer segment. Use the CLVcalculator to generate an average CLV for a typical customer in the segment. Then, multiply theaverage CLV of a customer by the number of customers in that segment to obtain the CLV of the entiresegment. You can use this to compare the CLV of one customer segment to another.You can also use the CLV to estimate how much to spend to acquire a customer. Put a zero in theacquisition cost box and run the model. The calculated CLV will tell you the maximum you can spend toacquire the customer.Visualizing Your ResultsUse the Table and Graph on the next spreadsheet to help you visualize your results.Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) developed this toolkit. HBS Toolkitsare developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data,or illustrations of effective or ineffective management.Copyright 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No partof this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by anymeans --electronic, mechanical, photocopying, recording or otherwise -- without the permission of Harvard Business School.

This is the total cost expended by the firm to acquire the customer.The expected contribution margin is calculated by multiplying the annual contribution margin (m) by the probability that the customer has a relationship with the store in a particular year (RR)t-1CLV is calculated by summing the expected annual contribution margin across all years in the customer lifetime and then subtracting the acquisition cost.Enter the annual contribution margin received by the firm from the customer. Remember the annual contribution margin = (price per unit - variable cost per unit) * number of units sold per year. If variable costs are not known, use COGS to calculate the annual gross margin and use that to calculate CLV.Enter the total costs the firm will expend to acquire the customer.The total value of the customer to the firm over the purchasing lifetime of the customer. Calculated by multiplying the annual contribution margin of the customer by the margin multiple, and then subtracting the cost incurred to acquire the customer.Enter the firm's discount rate. If none is given, use a number between 10% and 12% as a safe estimate. If you want to ignore the time value of money, enter 0% in this box.Enter the expected number of years you expect to have the customer purchasing from the firm.Enter the expected percentage of customers who will leave the firm in an average year.Enter the expected percentage of customers who will remain with the firm in an average year.The years of purchasing life are either entered above or calculated by using the churn rate (L= 1/CR) or the retention rate (L = 1/(1-RR).The annual churn rate is either entered above or calculated by using the retention rate (CR = 1-RR) or the years of purchasing life (CR = 1/L).The annual retention rate is either entered above or calculated by using the churn rate (RR = 1 - CR) or the years of purchasing life (RR = 1-1/L).

Table-Graph Advanced ModelCustomer Lifetime ValueAnalysis Quantitative ToolkitCustomer Lifetime Value TableThis table automatically populates based on the values you entered into the Excel Advanced Model. It shows you theExpected Annual Contribution Margin, the Discount Factor, the Discounted Expected Contribution Margin, and AcquisitionCost of the customer.The CLV calculation sums the discounted expected contribution margins over the series and subtracts theacquisition cost.YearExpectedDiscounted ExpectedContribution MarginDiscount FactorContribution MarginAcquisition Cost1$50.001.00$50.00-$20.002$45.000.89$40.183$40.500.80$32.294$36.450.71$25.945$32.810.64$20.856$29.520.57$16.757$26.570.51$13.468$23.910.45$10.829$21.520.40$8.6910$19.370.36$6.9911$17.430.32$5.6112$15.690.29$4.5113$14.120.26$3.6214$12.710.23$2.9115$11.440.20$2.3416$10.290.18$1.8817$9.270.16$1.5118$8.340.15$1.2119$7.500.13$0.9820$6.750.12$0.7821$6.080.10$0.6322$5.470.09$0.5123$4.920.08$0.4124$4.430.07$0.3325$3.990.07$0.26all values of t > 25$1.07CLV$234.55Customer Lifetime Value GraphThis graph automatically populates based on the values you entered into the Excel Advanced Model. It shows you theprofit inflows and cost outflows the firm anticipates from the customer over her lifetime.Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) developed this toolkit. HBS Toolkitsare developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data,or illustrations of effective or ineffective management.Copyright 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No partof this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by anymeans --electronic, mechanical, photocopying, recording or otherwise -- without the permission of Harvard Business School.

Table-Graph Advanced Model

Discounted Expected Annual Contribution MarginAcquisition CostsYearDollars

Toolkit HelpQuantitative ToolkitHow-To GuideIntroductionStrong marketers combine creative thinking with rigorous quantitative analysis to make competent marketing decisions.These online quantitative toolkits were designed to help facilitate the quantitative analyses that you will use to guide yourmarketing decision making. There are five toolkits, each focusing on a particular type of quantitative analysis:Situation AnalysisBreakeven AnalysisCustomer Lifetime Value AnalysisMarket Size and Market Share AnalysisPricing and Profitability AnalysisToolkit ContentsEach toolkit contains an Introduction which explains the analytical concept, explores how it is used in marketing decisionmaking, and shows in words, mathematical formulas, and concrete examples how to calculate the answer. To begin, youshould carefully review the Introduction so that you are familiar with the analysis, how it is calculated, and how andwhen it is used in marketing. The Introduction is contained in the first spreadsheet within the toolkit.The second spreadsheet within each toolkit contains a Sample Problem, which guides you through the analyticalconcept, shows you the solution using pen and paper methods, and then shows you how to populate the prebuiltExcel model to yield the solution.Once you have grasped the analytical concept, you are ready to explore the Prebuilt Excel Spreadsheet Models whichaccompany each toolkit. These models are designed to do the calculations for you. Each model contains two sections:In the Input Section, you will need to input various pieces of data to be analyzed. Values must beput into each of the cells in the Input Section in order for the model to run. For example, you maybe asked to input the price of the product, the variable costs of the product, the fixed costs of the product,the acquisition cost of a customer, the total number of customer in a market, etc. These values are themodel's "assumptions" which drive the calculations and are usually found in the case exhibits or text.Once all of the input values are inputted, the model is ready to go to work. Prebuilt formulas in theOutput Section automatically calculate key components of the quantitative analysis. For example, someof the output sections calculate Total Revenue, Total Costs, and Total Profits. Each of the models' OutputSections calculates the final answer; for example, the Breakeven Analysis toolkit's model calculates thebreakeven quantity, the Customer Lifetime Value Analysis toolkits' model calculates the CLV of a customer.It is important that you do not enter values into the Output Section of the model, as this may overwriteformulas that run the analysis. Cells containing prebuilt formulas are colored yellow; you shouldalways avoid changing anything in a yellow cell.Note: the values contained in the Excel model Input Section are random values. You should change these valuesbefore using the tool to solve a problem.The Prebuilt Excel Spreadsheet Models are contained in the third spreadsheet within the toolkit.Some of the toolkits contain Graphs and Tables which help illuminate the analytical concept and help you visualizeyour answers in context. The Graphs and Tables automatically create themselves once data is inputted into the Input Section.You should avoid entering anything into the Graphs and Tables spreadsheet, as this may overwrite necessary formulasthat create the Graphs and Tables. The Graphs and Tables spreadsheets are contained in the spreadsheet after the PrebuiltExcel Spreadsheet Models within the toolkit.The final spreadsheet in each toolkit is this Toolkit Help page. You may refer to this guide if you are having troubleunderstanding how to use the toolkit.Using the ToolkitsEach of the Prebuilt Excel Spreadsheet Models is built in Excel, so you need to be familiar and facile with Excel beforebeginning to use the toolkits. The basic Excel operations that are needed to use the toolkits are as follows; if youare not familiar with these operations, you should use the Help tab in your Excel software to learn how to do them.File Open and SaveYou can download the toolkits directly into Excel.Important Note: All of the toolkits contain a prebuilt Excel model. Any changes you make to the file are permanentonce you save the file. To maintain the integrity of the prebuilt model, save the toolkit to your desktop. Then, when youare ready to run an analysis, open the toolkit file and immediately save it with another name so that you cancalculate your results.Using Multiple Spreadsheets within a FileEach toolkit contains multiple spreadsheets within it, as outlined above. You can switch between the spreadsheets byclicking on the appropriate spreadsheet on the bottom left hand side of the screen.Entering Values into CellsIn the Input Sections of the toolkits, you will be asked to enter values in various cells. These inputs will be usedin the model calculations.Using Cell References and FormulasThe Excel spreadsheet models in the toolkits are prebuilt, which means you do not need to write Excel formulasyourself; however, you should familiarize yourself with the formulas that are in the cells in the Output Sectionso that you can create your own spreadsheet models and customize the analysis, as needed.PrintThe Output Section, graphs, and tables can be printed by highlighting the desired print area.Getting Help while in the Toolkit ModelsEach Prebuilt Excel Model features red celltip markers which contains information on what to enter into each celland/or what the formula in the cell is calculating. These can help guide you through the tool. To access the helpfulinformation, place your mouse over the red celltip located on the top right hand corner of a cell.The red celltip marker looks like this (see below); run your mouse over it to see how it works.Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) developed this toolkit. HBS Toolkitsare developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data,or illustrations of effective or ineffective management.Copyright 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No partof this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by anymeans --electronic, mechanical, photocopying, recording or otherwise -- without the permission of Harvard Business School.

CLV is calculated by summing the discounted expected annual contribution margin across all years in the customer lifetime and then subtracting the acquisition cost.The discount factor is equal to 1/(1+i)t-1.This is the present value of the annual contribution margin obtained from the customer in each year. It is calculated by multiplying the expected contribution margin by the discount factor.This is the total cost the firm expends to acquire the customer.The expected contribution margin is calculated by multiplying the annual contribution margin (m) by the probability that the customer has a relationship with the store in a particular year (RR)t-1.This is a red celltip marker. This box will contain information to guide you through how to use the toolkit models.