Lifetime Value and Loyalty Programs - Essay Example

Retaining good clients ensures the gradual improvement of an organization and its royalty program. Therefore, it is essential to identify and maintain the most rewarding clients in any royalty program (Wreden, 2007). The results from lifetime value (LTV) calculation are useful in categorizing the clients and identifying the most rewarding ones so that they are retained in the royalty program. In this regard, a basic understanding of the estimated duration a customer is to abide by a specified royalty program, and their purchasing behaviour for the duration they are attached to the specific product, is necessary for their review regarding a royalty program under lifetime value (LTV). This is because the profitability levels of different clients differ, and thus being able to detect the most rewarding customers is essential. Based on the number of consumers under investigation, LTV can be carried out on the whole customer base or through segmentation (Hughes, 2014). Although the latter is more demanding, it's more effective in analyzing clients. For the royalty program, the acquisition cost is considered as ‘sunk cost’, and thus not used in the calculation, as the customers are part of the current customer base. To effectively analyze the customers, analysis needs to be executed at a group level using the test versus control situation approach. In this case, the tests are used to realize the loyalty program, an aspect not addressed by control. In this regard, for success to be realized, the lifetime value should be higher than the investment costs. Therefore, LPV is an efficient tool for evaluating the worthiness of a future royalty program (Rodgers & Peppers, 2004).