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Prospect Lifetime Value vs. Customer Value

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by

Jinju Baek

on 14 August 2013

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Transcript of Prospect Lifetime Value vs. Customer Value

Topic
Prospect Lifetime Value vs. Customer Value
Purpose
To account for the lifetime value of newly acquired customer (CLV) when making prospecting decisions.


Construction
The expected lifetime value (PLV) is the value expected from each prospect minus the cost of prospecting.
The value expected from each prospect if the acquisition rate (the expected fraction of prospects who will make a purchase and become customers) times the sum of the initial margin the firm makes on the initial purchases and the CLV. The cost is the amount of acquisition spending per prospect. The formula for expected PLV is as follows:
Prospect Lifetime Value ($)= Acquisition Rate (%) * [Initial Margin ($) + CLV($)]- Acquisition Spending(S)

Example
A service company plans to spend
$60,000
on an advertisement reaching
75,000 readers
. If the service company expects the advertisement to convince
1.2%
of the readers to take advantage of a special introductory offer (priced so low that the firm makes only

$10 margin
on this initial purchase) and the CLV of the acquired customers is
$100
, is the advertisement economically attractive?

Detail 4
Here Acquisition Spending is $0.80 per prospect, the expected acquisition rate is 0.012, and the initial margin is $10. The expected PLV of each of the 75,000 prospects is
PLV= 0.012*($10+$100)-$0.80=$0.52

Prospect Lifetime Value ($)= Acquisition Rate (%) *
[Initial Margin ($) + CLV($)]
- Acquisition Spending(S)

PLV= 0.012*($10+$100)-$0.80=$0.52

Full transcript