Customer Lifetime Value (CLV) as a Core Customer Metric
The latest edition (3 April 2008) of The Wise Marketer newsletter has some nice discussion regarding the idea of Customer Lifetime Value as a Core Customer Metric that is predictive of profits. (Sign up for your own copy at the link above, or if you have some cash laying about, about $2,300 in the US, you can buy their report The Loyalty Guide for yourself)Not surprisingly, the concept relies upon both current and expected information for its calculation. First, one assesses the current value of a customer (revenues less costs) for a single financial period. Next, using various techniques for projecting this information, you calculate the expected annual value of this customer for each subsequent year, as well as an expected tenure.
Given the “start-up” costs for many industries (acquisition, product cost, servicing and fulfillment costs, etc.), it isn’t a shock that after the initial few periods of amortizing these start-up costs, even modest customers can become very profitable over time.
The Wise Marketers point out that this calculation differs greatly by three important 
factors: 1) the industry Sector; 2) the product; and 3) the period of analysis. Even if your calculation of the Customer Lifetime Value isn’t 100% accurate, it does give you a way to compare various customers in your customer base. If you are in an industry that can provide differentiated service, this allows you to guide your front-line employees to provide better service to customers who have higher CLV’s.
The weakness, of course, is that CLV relies upon a lot of assumptions about tenure, future product purchasing and future costs. A 30 year old woman with a low financial services wallet might have higher costs and lower revenues for you today, but over her lifetime, IF you keep her, and IF you get your fair share of her wallet over time and IF she doesn’t cost you and arm and a leg to service, should be a good investment. But those are some pretty big ifs. And, once you’ve decided that your high CLV customer is worth your time, what aspects of her relationship do you need to actively manage in order to keep her a customer? The crux of a Core Customer Metric is that it is one that isn’t just predictive of the financial outcomes, it inherently includes some relative measure of stickiness or loyalty.
The best Core Customer Metric not only points to which customers are sticky or loyal, but which aspects of the Customer Experience are critical for increasing or decreasing the metric.
(Graphic used with kind permission from Adelino de Almeida’s blog: Profitable Marketing http://adelino.typepad.com)
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One Response to “Customer Lifetime Value (CLV) as a Core Customer Metric”
December 2nd, 2008 at 6:39 pm
Very interesting article. Obviously, the key to retaining customers with a higher CVL is excellent customer service. The successful companies seem to employ successful strategies for maintaining those loyal customers.
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