Customer
Lifetime
Value

Basically, the idea is that if you fuss over a customer to make sure they repeatedly purchase your product, you will make a lot of money over several years - so.... it makes sense to do a lot for the customer in the beginning because over the "lifetime" of the relationship they have with you, you can sell a lot of product and recover the costs of incentives, free shipping, gift wrapping and other things you did in the beginning to hook them in.

It is also understood that one of the best ways to grow a business is take the existing customers you have, and make them long-term repeat customers.

WTGR

Well, if you pick your customers carefully, such that they fit the products and services you are offering, chances are they will be satisfied customers and you can sell them a lot over a long long period of time.

The consequence of this approach means that adopting a Velvet Rope policy can lead to CLV, which can in turn save you money on marketing promotions to the public in general. Instead of wasting money on mass advertising at large, you can focus on your niche market, and, for some special types of products and services, it works.

Adam found this story in the online edition of the 
Wall Street Journal: Classrom Edition.

In an email, Adam explains

I found a story on the ‘velvet rope’ strategy and the impact of Customer Lifetime Value we had discussed in class. Many of the major mass merchandisers (such as in this story, Best Buy), have developed large customer databases from customers shopping online and in their retail stores, detailing their purchase habits and are now using them to see if they are desirable or undesirable. This is a good example of a firm using customer information by gathering data from Point of Sales Terminals and Online retailing website and using the information gathered to profile customers based on their CLVs.

This is done in Best Buy’s adapting to the 6 environments, but most importantly, the competitive environment: Best Buy is adapting to the competitive environment of Dell and Walmart moving into TVs and portable electronics. Walmart, in particular, is experienced and poised to succeed by focusing on the high volume, but low margin customers, Best Buy decided it was best not to focus on this sector, but instead, focus on wooing and drawing the high value customers that they current have in their customer database. This allows them to maximize the return invested in the marketing by only funnelling the best customers into the store and keeping the ‘devil’ customers away, who eat into the margins of the stores.

Thanks Adam, WTGR

focus 
on 
good customers

get rid 
of bad customers

The Customer Isn't Always Right: Best Buy Wants to Keep the Wrong Kind of Shopper Out of Its Stores

McWilliams explains
"Each day, about 1.5 million customers come into a Best Buy store. Best Buy wishes some of them wouldn't. Best Buy CEO Brad Anderson says he wants to separate "angel" customers from the "devils" The angels, according to Best Buy, are customers who boost profits at the consumer-electronics giant by snapping up HDTVs, portable electronics, and newly released DVDs without waiting for markdowns or rebates."

McWiliama writes
"Best Buy estimates that as many as a fifth of 500 million customer visits each year are undesirable. And the CEO wants to be rid of them. He says the strategy is based on a theory that advocates rating customers according to profitability, then dumping the up to 20% who are unprofitable. The new approach upends standard practice among mass merchants, who typically seek to maximize customer traffic."

in the
"information age"
 

From a "White paper" from the SAS company
 http://www.sas.com/offices/europe/slovakia/events/pdf/profitability.pdf 
author, Gary Cokins

"SAS is the leader in business analytics software and services, and the largest independent vendor in the business intelligence market"
 

Why do customer-related costs matter
- we need to know how much it costs to obtain customers, and keep customers

Should we pursue the most profitable or the most valuable customers
Customer lifetime value — viewing customers as an investment
CLV math

author Gary Cokins gary.cokins@sas.com explains
"In the last 10 years, five major forces are converging to place immense pressure on companies"

Customer retention. 

"It is generally more expensive to acquire a new customer than to retain an existing one—and satisfi ed existing customers are likely to buy more and also “spread the word” to others"

"In the past, companies focused on building products and selling them to every potential prospect."

"There is now a shift from mass marketing products a seller believes it can sell to better understanding each customer’s unique preferences and what he or she can afford."

"As product and service-lines proliferate, such as new colors or sizes, complexity increases. As a result, more indirect expenses (i.e., overhead costs) are needed to manage the complexity"

"The Internet is shifting power—irreversibly—from sellers to buyers. Thanks to the Internet, B2C consumers and B2B purchasing agents can more efficiently explore more shopping options and more easily educate themselves. Customers have an abundance of options; and now they can get information about products or services that interest them in a much shorter amount of time."