TUSCAN LIFESTYLES

ACCESSING CUSTOMER LIFETIME VALUE

What is the average lifetime value of a customer whose initial purchase is less than $50?
• $2,20 (Refer to Appendix I)
• Even though the CLV for customers whose initial purchase was less than $50, the value growth of these customers grew in large increments (refer to the graphs below). It is our opinion, that while this number is low it is significant enough in the later years that it would be worthwhile for Tuscan to continue to pursue their business.

What is the average lifetime value of a customer whose initial purchase is $50 or greater?
• $63,21 (Refer to Appendix I)
• The CLV for Tuscan customers whose initial purchase was greater than $50 was significantly and consistently higher then the customers whose initial purchase was less than $50 (refer to the graph below).














Based on these expected lifetime values, what marketing plans might be advisable?
• Focus on customers whose initial purchase is $50 or greater.
- By focus, we suggest that special incentives become available to these costumers through mailings or a special loyalty program.
• Differentiate the catalogues mailings according to the results fostered from the CLV research.
- For example, the customers who are in the $50 or above category should continue to receive the traditional number of mailings.
- The lower category of costumers who initially spent less should receive less catalogues in the mail. As previously stated however, these customers are still a valuable asset and should not be completely ignored. These consumers should be lured back to the company through specialized promotions catered to their comparatively lower spending habits.


Do you agree with Joan’s assumption that 5 years is a reasonable time horizon? Why or why not?
• We agree with Joans assumption that five years is a reasonable time frame for determining certain customer characteristics.
• As our analysis the average lifetime duration is less than 3 years (refer to appendix I). Therefore, anything over the three year time period results in diminishing returns.
• Approximately 95% of the customers did order 1 item or less in their 5th year (again refer to exhibits 1 and 2 of the case).

Do you have suggestions for other ways to group customers for determining lifetime value?
• Product group
- Segregate customers in terms of the products they purchased. While in this specific industry it is unlikely that a customer will make identical product purchases on an annual basis. However, it is possible that the consumer will make similar product purchases and this is a possible strategy that Tuscan should pursue.
• Expand the denominations used to categorize Tuscan’s customer base. Two groups are too vague of criteria to use to truly determine accurate customer habits. It is our opinion, that two additional categories are added in order to add more depth to the information ascertained as explained by the graph below.











What additional information might be helpful to Joan?
• Additional demographics of customers: income, sex, age, etc….
- While some of this information was already provided to Joan and Tuscan through the response list, the information was seemingly neglected. Tuscan should further categorize the demographics of its costumers and utilize this information through overlapping it with the CLV results.
• Explore the possible advantages of applying an RFM model to the Tuscan data.

Appendix 1

Method to calculate CLV

Use formula:



In which:

- CLV is customer lifetime value.
- Ordersizet is the amount of purchase per order at time t.
- Margin is 42% given in the case.
- AC is acquisition cost: AC = ($0.85´1000 catalog)/23 new customers = $36.96.
- T is number of time period. T = 5.
- r is discount rate. r = 10%.
- 6t is annual catalog cost in year t. 6t = $0.75 ´ 8 catalog. In this calculation, we ignore the discounted value of $6 catalog cost per year because the discounted amount is so small.
- rt is retention rate, which is the number of customers in cohort buying in (t) and also buying in (t-1) / Number of customers in cohort buying in (t-1).
- The average customer lifetime value is the simple average of the customer lifetime mean values (CVL mean) in 5 years.

Average lifetime duration

Formula:

Average lifetime duration ={ Customers retainedt * Number of periods} / N

Where: N = cohort size = number of customer at the beginning period.
T = time period
Customers retainedt is number of customers retained in period t.