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New user (registered within last 60 days)

(a)

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6

3

Visitor

sessions

2

1

0

Active user (has used within last 60 days)

(b)

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6

6

Visitor

sessions

4

2

0

Dormant user (has not used within last 60 days)

(c)

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6

3

Visitor

sessions

2

1

0

Inactive user (registered, but not used)

(d)

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6

1

Visitor

sessions

0.5

0

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Part 2  Strategy and applications

 Lifetime‑  value  modelling

An appreciation of 

lifetime value (LTV)

 is also key to the theory and practice of customer 

relationship management. However, while the term is often used, calculation of LTV is not 

straightforward, so many organisations do not calculate it. Lifetime value is defined as the 

total net benefit that a customer or group of customers will provide a company over their 

total relationship with a company. Modelling is based on estimating the income and costs 

associated with each customer over a period of time and then calculating the net present 

value in current monetary terms using a discount rate value applied over the period.

There are different degrees of sophistication in calculating LTV. These are indicated in 

Figure 9.18. Option 1 is a practical way or approximate proxy for future LTV, but the true 

LTV is the future value of the customer at an individual level.  Lifetime-  value modelling at a 

segment level (4) is vital within marketing since it answers the question:

How much can I afford to invest in acquiring a new customer?

 Lifetime-  value analysis enables marketers to:

● 

Plan and measure investment in customer acquisition programmes

● 

Identify and compare critical target segments

● 

Measure the effectiveness of alternative customer retention strategies

● 

Establish the true value of a company’s customer base

● 

Make decisions about products and offers

● 

Make decisions about the value of introducing new e-CRM technologies.

Figure 9.19 gives an example of how LTV can be used to develop a CRM strategy for dif-

ferent customer groups. Four main types of customers are indicated by their current and 

future value as bronze, silver, gold and platinum. Distinct customer groupings (circles) are 

identified according to their current value (as indicated by current profitability) and future 

value as indicated by  lifetime-  value calculations. Each of these groups will have a customer 

profile signature based on their demographics, so this can be used for customer selection. 

Different strategies are developed for different customer groups within the four main value 

groupings. Some bronze customers such as Groups A and B realistically do not have devel-

opment potential and are typically unprofitable, so the aim is to reduce costs in communi-

cations and if they do not remain as customers, this is acceptable. Some bronze customers 

such as Group C may have potential for growth, so for these the strategy is to extend their 

purchases. Silver customers are targeted with customer extension offers and gold customers 

are extended where possible although these have relatively little growth potential. Platinum