How valuable are your customers? The strategic importance of measuring Customer Lifetime Value
Posted on 4th May 2017
Customer experience becomes a strategic indicator for B2B as well as B2C companies. Offer a first-rate customer experiences is now essential to retain customers and grow revenues. Know and measure the Customer Lifetime Value (CLV) of each customer is the key to target the best clients to retain them, but also attracting new customers.
How to measure this strategic indicator? And which levers to pull to increase your Customer Lifetime Value?
What is Customer Lifetime Value?
The Customer Lifetime Value (CLV) represents a projection of the total net profit a company makes from any given customer. CLV is a projection to estimate a customer’s monetary worth to a business after factoring in the value of the relationship with a customer over time. CLV is an important metric for determining how much money a company wants to spend on acquiring new customers and how much repeat business a company can expect from certain consumers. Measuring CLV can help you optimize each Sales or Marketing action and drive your strategy with a ROI vision.
Why customer segmentation is important?
Customer segmentation is the practice of dividing a customer base into groups of individuals that are similar in specific ways. You can provide different value propositions to different customer groups. Customer segments are usually determined on similarities, such as personal characteristics, preferences or behaviors that should correlate with the same behaviors that drive customer profitability. Indeed, Customer Lifetime Value is only relevant if it is related to customer segments depending of the lines of business, revenues or type of clients!
A customer segmentation model allows for the effective allocation of marketing resources and the maximization of cross and up-selling opportunities. When a group of customers is sent an email that is specific to their needs, it’s easier for companies to send those customers special offers.
Other benefits of customer segmentation include staying a step ahead of the competition and identifying new products that existing or potential customers could be interested in.
How to measure CLV?
There are many ways to calculate CLV. Components such as the churn rate, the discount rate, the gross margin or the retention cost can influence the formula, so each company will have to figure out its own calculation according to its products or services. Though the most common equation goes as follows:
Recurring revenues – recurring costs = gross contribution margin – marketing costs = net margin x expected # of purchases over next three years = accumulated margin – acquisition costs = CLV
What are the main benefits?
CLV gives precious insights about the life cycle of each customer, its profitability, the relevant marketing and sales actions to implement and its potential at every step of the customer relationship. This information allow the Chief Marketing Officer and the VP Sales to prioritize the customer segments to contact, the budget to invest in each action and to target the customer most likely to churn or to buy new products or services by look-alike deduction.
Basically, improve your CLV means improve your customer experience. CLV can be improved through various axes:
- Post-sale communication, for example follow-up emails or text messages through a mobile app, to answer the most frequent questions and anticipate a possible claim;
- Personalized content to retain your customer by providing best practices about your products or solutions, answers to his daily issues, and so on;
- Loyalty program: privileged offers to some products, exclusive information, events invitation or membership discounts, there are many ways to build a loyalty program and improve customer satisfaction – and thus, Customer Lifetime Value;
- Up-sell/Cross-sell: by identifying up-sell or cross-sell opportunities, Marketing and Sales departments can grow each account’s revenue. Predictive marketing solutions can allow you to anticipate your customer needs by analyzing sales history and maximize the potential of the customer base.
CLV can measure customer loyalty but also help you develop your business with each customer, deliver experiences to customers to increase profitability, retention and drive lifetime value. This powerful tool can be a real asset for your Sales and Marketing strategy by becoming more customer-centric and take data-driven decisions focused on long-term performance. So what are you waiting for?
