The story of Starbucks transformation from a small independent coffee shop tucked away in a corner of Seattle’s Pike Place Market to a cultural phenomenon spanning the globe is legendary. A number of factors have been attributed to the success - one being a keen understanding of its patrons. There are multiple methods used to obtain customer information and the value derived therein. Customer lifetime value is one.
Customers are assets, and their values grow and decline. Segmenting customers based on their lifetime value is a powerful way to target them because marketing mix activities can then aim at enhancing customer value. (Ho, 2006)
Roughly translated, customer lifetime value is the projected profits that a customer will generate during their lifetime. We used the case data to segment Starbucks customers into three distinct categories of unsatisfied, satisfied and highly satisfied. Fortunately, the case provided some useful data to make our initial assumptions about the stream of expected revenues from each category.
Exhibit 9 Unsatisfied Satisfied Highly Satisfied
Number of Starbucks Visits/Month 3.90 4.30 7.20
Average Ticket Size/Visit $3.88 $4.06 $4.42
Average Customer Life (Years) 1.10 4.40 8.30
The data allowed us to calculate the annual expected revenues by taking 12, the number of months in a year, times the product of each component given in Exhibit 9 for each category of customer.
Unsatisfied Satisfied Highly Satisfied
Expected Lifetime Future Revenue $ 199.74 $ 921.78 $ 3,169.67
To derive the CLV it is necessary to determine the profits. This requires taking costs against the expected future revenues. The expected costs are typically any amount incurred from attracting, selling and servicing customers. The best representative cost of servicing the customer from the given data was the gross margin from Starbucks financial
Cited: Ho, T.-H. (2006). Incorporating Satisfaction into Customer Value Analysis: Optimal Investment in Lifetime Value. Marketing Science , 260-277. MOON, Y. (2006). Starbucks: Delivering Customer Service. Harvard Business Review .