Wikipedia defines Customer Lifetime Value as – In marketing, customer lifetime value (CLV) (or often CLTV), lifetime customer value (LCV), or life-time value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer.
Based on the definition, it would be necessary for a company to ensure long-term relationships with customers in order to get any real customer lifetime value. Despite this, many companies often fall ‘prey’ to difficult customers and tough situations and believe that the best course of action would be terminate such relationships. Attracting new customers is a lot harder than retaining new ones – a customer service truism that many companies fail to heed. Companies would be better off if they were to create a customer service and engagement mind-set and inculcate a culture where everyone understands the meaning and criticality of customer lifetime value. With so many new companies, offering similar or better variants of the same product or service, it would be tough to keep customers let alone trying to ascertain the customer lifetime value.
Customer centric companies focus on delivering consistently good service and memorable experiences to customers, who in turn ensure repeat business, loyalty and encourage others to become customers. Such behaviour would drive customer lifetime value, but companies must continue to do their part by putting together innovative strategies to address not only the needs of customers but also to develop personalized relationships with each. Despite, the importance of customer lifetime value, many companies still seem perplexed and unable to meet this goal. The biggest hurdle possibly for companies is that there processes and service standards are generalized – they attempt to provide ‘umbrella’ service to all – this is highly unrealistic, given that all customers are different and must be treated so. These companies forget the importance of customer segmentation based on how profitable a customer is to the company. The more profitable the customer, the harder a company must try to retain them since that is how customer lifetime value can be truly assessed and would provide indications as to the kind of profits a company can expect to make over time.
It is crucial for companies to ascertain customer lifetime value and know how much a new customer would be worth, such that they can decide how much they would need to spend on new ‘conversions’ and how much they should expend to keep current customers. With limited resources, it would be highly costly and detrimental for companies to spend too much or too little on either group. Putting together a system to decide on customer lifetime value, will enable companies to know the ‘potential’ value of new customers, thereby ensuring more relevant campaigns and promotional activities, to achieve better results. Such focused attention will ensure personalization, timeliness and highly relevant campaigns that would engage customers longer, raising the customer lifetime value. Even a marginal raise in the customer lifetime value can dramatically raise the company’s earnings and profits.
The major benefit of measuring customer lifetime value is that it is a forecast – a predictor of the future value of a customer, which in turn would help companies predict their earning and profits. As companies measure, customer lifetime value they also begin to understand that relationships with customers are no longer only ‘nice to have’ but rather are invaluable assets for them. It enables them to shift focus from short-term benefits and profit making endeavours to long-standing associations, which has a positive effect on overall customer satisfaction and loyalty. The fact is that resources are limited for any company and hence companies would need to use them to maximize their profits and use them for customers that would help them do so. However, in order to use the resources wisely, companies should know exactly how many resources would be required in order to ensure customers are profitable. Measuring the customer lifetime value equips a company with data to know how much would be needed to retain the customer with optimized returns. Once a company can determine the most profitable customers using customer lifetime value, it can allocate the resources in a planned and structured manner and customize the manner of communicating with such customers.
It is extremely crucial for companies to know and understand their most profitable and important customers and ensure that they see mutual benefit by doing business with your company. Customer lifetime value helps your company to develop a better understanding of customers, allocate resources and put together effective strategies to retain them. In addition, customer lifetime value can help a company develop alternative and improved strategies for marketing based on their target groups. Based on the ‘value’, each group would have a separate budget, pricing, acquiring and retention strategies, channels of communication, loyalty programs and other such differentiations, creating win-win situations for both parties involved.
Many companies still face a dilemma of not knowing how much of their marketing and advertising costs are useful and how much is wasted. By using, the customer lifetime value standard companies would be able to determine their target audience, the messages delivered and the best possible channels to reach out. So rather than blindly communicating to the masses, companies would be able to veer their attention towards a niche audience – focused, customized and relevant. Such communication and attention would be perceived as great quality customer service, which is possibly the most crucial and profitable portion of a business now. By upgrading and constantly revamping the service customers receive, a company would be ensuring a high customer lifetime value through its target audience. Another way to improve customer lifetime value is by making customers feel valued and important – many companies use loyalty programs and reward their customers through a variety of ways. A company could calculate customer lifetime value, pre and post the implementation of loyalty programs to ascertain how much they would need to spend in order to make the programs valuable for the customers.
By using the predictive nature of customer lifetime value, companies would know if any customers seemed to be moving away – based on their buying patterns. They would be able to fix the problem before the customer decides to move away. This would save the company huge costs and a lot of time and effort, which would otherwise be spent on gaining new customers. In addition, letting existing and possibly long-standing customers go would shake the very foundation of a company and disturb the economical equilibrium for a very long time – which no company can afford.
Among the assets of a company, customers are probably one of the most valuable. The data gained from the customer lifetime value metric should be used to let everyone in the organization work towards a culture of customer service and focus their energy in gaining customer satisfaction and long-term engagement. Short-term gains must not replace long-term value and each person within the company must aim to retain every valuable customer. The company must share information with its workforce, enabling them to understand the more valuable customer segments and the strategy the company would like to use to gain the maximum from these relationships. The fact is that when determining the value of the customer, a company must look beyond the current value to a long-term and progressive relationship that would provide sustained and higher profits.
