Customer Lifetime Value – Putting a Price on Profit Potential
What Is Customer Lifetime Value?
Take a look at your current customers. How well do you understand their value? Do you know how much revenue they produce for you? Do you understand how much it costs you to generate this revenue? And more importantly, are you able to predict these values into the future?
Customer lifetime value (CLV) is an important metric for organizations who want to get a more accurate view of their customers and become more profitable in the process. Understanding CLV allows you to make changes to your business to attract, convert, and retain more high-value customers, while increasing the overall value of your entire customer base.
While there are many simple approaches to calculating average CLV, predicting true customer-level CLV and implementing it as a performance metric across your entire organization is a complex process. Many companies fail when it comes to CLV because they underestimate the amount of change it will require to be successful. On the other hand, companies who get it right see real improvements in their long-term business results.
Measuring Customer Lifetime Value
When measuring CLV, consider more factors than just revenue. To accurately identify your most profitable customers, also consider their costs, how long they will stay with your business, and how likely they are to increase (or decrease) their spend over this period.
To continue the example, if your customer spends a significant amount of time on the phone with your support team, they may quickly cost more than they are worth to your company in terms of revenue. Similarly, if your Sales Team needs to offer huge discounts to get a customer on board, the profitability of that customer decreases—after all, you’ve now trained that customer to expect discounts.
Finally, if you identify certain customers who aren’t profitable today, but are likely to buy more from you in the future, it may be beneficial for you to continue to build your relationship with them. With an accurate predictive model, you may find that their lifetime value over the course of their relationship with you outweighs the short-term costs.
Building a robust CLV model can be very complex and will likely incorporate retention, upsell probabilities, and cross-sell probabilities––as well as detailed estimates of costs. It also typically requires collaboration with your finance team to get accurate estimates of servicing and acquisition costs.
Turning CLV Into an Enterprise-Wide Initiative
CLV by itself does not lead to higher retention or growth. CLV is simply a metric or key performance indicator (KPI) that needs to be incorporated into strategic decisions across the organization to be effective. No single team, functional area, or department can implement a transformative CLV initiative on their own.
Why? Because achieving the benefits of a CLV initiative requires a significant amount of organizational change. You must be willing and able to adapt your business, change your strategy, and use all available information to make strategic decisions that will have a long-term impact on how your company functions across departments.
For example, using the data, you may identify that a certain segment of customers has a higher CLV than others. Your Marketing Team can use this information to target more of these customers, while your Sales Team can place more emphasis on converting them. Your Support Team may then prioritize these customers if they need assistance, while your Customer Relations Department can continue building a relationship to convince them to upgrade or purchase additional products from you in the future.
Similarly, you may use information about customer value to revise your pricing, bundle products, adjust your billing processes, or change your product offering altogether. In addition to using your new-found knowledge to appeal to your best customers, these decisions may lead to strategies to increase the value of unprofitable customers. In fact, in some cases, you may decide not to try and retain certain unprofitable customers, or even drop customers entirely if they are costing your organization more than they generate in revenue.
Clearly, making these decisions requires the full commitment of multiple departments, as well as your executive and leadership teams. And the impact of your decisions may not be realized for months or years down the line. That’s why it’s so important to see CLV as a holistic, long-term initiative—one that may require a significant organizational shift in thinking.
A Rewarding Initiative for Your Business
Done right, the long-term benefits of a CLV initiative far outweigh the costs. With a clear understanding of who your most profitable customers are, you can take steps to attract similar customers, retain existing high-value customers, determine the strategy for underperforming ones, and increase the overall value of your current customer base. By embracing CLV as a KPI across your entire organization and incorporating this information into your strategic decisions, you can take meaningful action to improve the profitability of your business.
Would you like to speak with someone to get a better understanding of your organization’s CLV? Talk to Shift Paradigm today.