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Customer Lifetime Value (CLV)

Netflix has used CLV calculations to maximize profits. Watch Raj Venkatesan explain how.
Let’s start by talking about Netflix. As of July 20, 2015, the stock price of Netflix was about $659. The market cap at the same date was about $47 Billion. Netflix is a company that has attributing a lot of their success to understanding customer relationships, understanding customer value, and accurately identifying the value of a customer relationship for themselves. Now, Netflix is a company that has cost a lot of disruption, end of media rental market. So for example, if you see before 2000, around here, media rental was basically about “you go to a store, pick up a movie or a TV series and then go watch and you’ve got to return it back”.
Netflix’s biggest innovation was to change that business model and start a subscription service. And so from after 2000, if you see, a lot of these companies have adopted this model. And then, it went with no stores, no physical stores. So now, it opened up a lot of these different kinds of business models over here. Before 2000, you saw that most of the columns are empty over here. After 2000, you have many companies with different models. But a key factor of the subscription model, is that you need to understand customer relationships and keep the customers for a longer time. So customer retention is extremely important. Let’s see how Netflix is doing on that aspect.
You can see here, the customer retention for Netflix has gone on and up foot 45° line. It’s gone from 70% to now close to 80 - 90%. That’s amazing for any company. At the same time, the acquisition rate has gone down but that’s natural. Over time, any company as they grow would want to see retention rates of existing customers go up, and acquisition rates going down. And that’s a good thing because companies shouldn’t always spend on acquisition in the later stages. And Netflix has achieved that fabulously. The same thing can be seen in terms of the number of new subscribers they have acquired. It’s almost like a hockey stick up here.
So Netflix has done everything right for a subscription business. It’s been able to have high retention rates, acquire customers at a good pace, and all of this is based on understanding how much money to spend on each customer, understanding the value of each customer to Netflix, how much to spend on technology and recommendation systems to improve customer retention, and in that process, customer value. So this makes the business case for understanding customer lifetime value. So what is customer lifetime value? Customer lifetime value computes the dollar value of an individual customer relationship. It is both backward and forward looking. I’m saying that because it computes the value of the customers in the future but it uses past data to project forward.
So what is CLV use for? It is used to determine how much to spend to acquire a customer, to determine how aggressively to spend to retain a customer or a group of customers and to even value a company. So these are some pretty powerful things that a marketing manager can do, if they understand the lifetime value of their customers. So the key is then, you probably are asking yourself– “How would we know the future value of a customer?”. And that’s what we’re going to learn now.

See the power of CLV in action as Raj shares the story of Netflix and how it uses CLV calculations to maximize profits.

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