TITULOS SUPLETORIOS

The CLV is the holistic customer value for a company over the entire duration of the business relationship. It is in addition to the current value of a customer for a company, and whose

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future development could play a significant role as well. It is possible that customers who are unprofitable at present could develop very positively in the future and generate substantial profits (Günter & Helm, 2003). The CLV is an individual, one-dimensional model based on prospective monetary data.

For example, a small customer may have a low value for the company at present, but if he/she is working in a booming industry, it is quite possible that he/she will have a high potential in the future. Neglecting such customers would lead to non-realization of the possible profits from them. The CLV takes both dimensions into account, thus providing a comprehensive picture of the total value of a customer. This information is necessary to decide whether or not to invest in a customer relationship, because the future development of the customer is relevant (Reinartz & Kumar, 2000).

The CLV represents the discounted net inflow of deposits and withdrawal flows of a customer to the company throughout the duration of the customer relationship. The calculation of CLV is based on the principles of calculating the net present value. It is derived from the dynamic investment calculation and is based on the assumption that future payments are worth less than present payments. Future cash inflows and outflows are cumulated and discounted with a defined discount rate for this customer, corresponding to the respective period (Brusco, Cradit, & Tashchian, 2003).

The CLV is composed of two dimensions, the current customer value at time t = 0, based on current and historical data, and the potential value of a customer, which reflects the development of certain values and sizes in future. Both components are individually calculated and assigned to the individual customer data. This makes it possible to generate two dimensions for the assessment and evaluation of a customer (Ryals & Knox, 2005).

Figure: 19 Customer lifetime value formula (Homburg & Daum, 1997)

𝑒𝑡 = Expected turnover from a certain customer in period t 𝑎_𝑡 = Expected losses from a certain customer in period t

103 i = Calculation interest rate

t = Period (t = 0, 1, 2, ..., T)

T = Duration of the customer relationship

A major disadvantage of the CLV method is that sales and costs cannot be planned in advance. These can only be forecast, either optimistically or pessimistically. The truth lies somewhere in between these extreme. Since a company cannot know the actual values, the average of these two values is mostly used for the calculation. It serves as a basic value to determine the monetary value of customers.

Figure: 20 CLV development (Beyer, 2013)

Turnover or contribution margins are only one aspect of customer value. To evaluate the future potential, other criteria need to be added. Significant questions that must be answered include, for example, whether the client’s customers will grow, whether the customer is loyal to the company and to the product, and what the future requirements of customers are. These and other similar factors must be compressed into a meaningful measure. Since the situation may change, such assessments should be repeated at intervals, preferably at the beginning of a new planning period or the fiscal year (Mowerman, 2009).

The CLV method also has some advantages. It is the only model that looks into the future, and can, thus, give much more information about customers than any other method. With such

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information, clear strategies and activities can be deduced. However, it is complicated and difficult for an SME to get this information. Another disadvantage of the CLV is the uncertainty of the forecast. A company can do the calculation, but there is no guarantee regarding the result because nobody knows how the business will fare in future. The CLV method is only an assumption (Reinartz & Kumar, 2000). Only the basis model, including the basic calculation, is not convincing enough for proper customer segmentation. A reason for this is that non- customers, i.e. the potential customers in a branch, cannot be included in the CLV method because the company has no data or figures about them. The company can only calculate CLV on the basis of assumptions, which adds an element of uncertainty to the calculations. Another element of uncertainty is the duration of the customer relationship, which is unknown and also has to be estimated. The last step is to calculate the real cost of a customer. This is especially difficult for an SME because not all costs can be directly attributed to a customer. Cuadros and Dominguez (2014) argued that it is important to identify costs, including all kinds of direct and indirect costs, which have been incurred due to the entire customer relationship. This is, however, difficult for an SME because marketing and sales expenses are ascribed to the sales department and then apportioned to all the customers (Mühlbacher, 2013), making it impossible to calculate the correct lifetime value of a single customer.