Financial Value of Customer Satisfaction: Using a Lifetime Value Calculator

Michelle B. Kunz, Morehead State University, based upon Merlot Link:
http://www.merlot.org/merlot/viewMaterial.htm?id=78629

An online calculator at Integrated Management Solutions, Inc.
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Initial Publication Date: August 11, 2010

Summary

This online calculator can easily be used for an in-class demonstration of the value customer satisfaction and retention brings to a company. The activity should take about 10 minutes, and provides a nice, interactive demonstration of the lifetime value of a customer to a company. The online calculator uses the value and frequency of purchase, annual purchase rate, and referral information to calculate the lifetime value of a customer's purchasing power. This is a quick and easy way to demonstrate the value that customer loyalty and continued patronage can provide a company.

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Learning Goals

The goal of this exercise is to demonstrate easily how valuable customer retention is to a company.
Additionally, students can see in a visual demonstration how long-term customer loyalty can provide financial revenue to a company.

Context for Use

This activity is a good in-class demonstration, as the discussion leads to developing customer loyalty and customer retention. I typically use this activity in my principles of marketing course, since the discussion covers loyalty and retention programs; however, it could also be used in a sales, retail, or consumer behavior course. This activity is a nice way to take a break during a class discussion, provide students the opportunity to input some data relevant to their individual perspective and see what value their lifetime purchases have to a company.

Description and Teaching Materials

After discussing the importance of customer retention, I like to take 5-10 minutes for this activity. I ask the students to jot down a list of four or five items they have purchased in the past week or so, and to include the approximate price they paid, in full dollars. I will jog their memory by mentioning say a nice meal they may have had over the weekend, or their "regular" daily cup of coffee, or can of soda, or perhaps their weekly grocery purchase. Then have them indicate how frequently they make each purchase—daily, weekly, etc. Now, calculate how many purchases they make on average per year.

Unless you have a large lecture class of 100 or more students, you can easily query the class, and get a variety of purchases to input into the online calculator. Thus, students can see the value of that daily Starbuck's coffee customer, and the weekly grocery purchase over a lifetime. I find students often are amazed at the value of their purchases over a lifetime.

Teaching Notes and Tips

This is a nice, quick break during a class lecture. Furthermore, I find it is a very easy way to summarize the value/importance of retaining customers. There is a short explanation page to the calculator that you can have students read if you would assign this outside of class. The calculator also asks for referrals, and an estimate of how many referrals would actually become customers. This is more appropriate if you are dealing with larger purchases, rather than say the daily cup of coffee—but that may also depend upon the class and students in the class. I also have found that younger students are more impressed by the results, while older non-traditional students are less surprised—as they have more personal experience with larger purchases.

Assessment

Questions I use in class to have student consider include:
  1. What do you think might happen if you increased the number of referrals a customer would make?
  2. What might happen if you could convert twice as many referrals?
  3. Would you now think a customer retention program might be a profitable investment?

References and Resources