Using the Customer Lifetime Value (CLV)
The CLV is one of the most important of all company metrics; it is an invaluable aid to company management, for reasons which include the following.
1. Knowing the CLV and making it, and the way it is calculated, known to all employees shows them just how valuable each customer is to the company. Smart managements make sure that employees connect the company’s success to their own – always providing that this is true. A later posting will discuss the role of employees; suffice it here to say that employees should share in the benefits resulting from improvements in the CLV – there are few loyal customers without loyal employees.
2. The CLV when calculated for each business segment, say by demographics, products, location etc. makes it easier to compare the margins generated by each segment and so decide how to allocate resources, how to identify weaknesses and to monitor the progress of each segment
3. The discounted CLV (Net Present Value - NPV) is the best indication of how much the company can sensibly spend to acquire a new customer. If the NPV is $1,000 then spending $100 to acquire a new customer might be a reasonable investment, if the NPV is $100,000 then clearly it would be smart to invest substantial funds to get a new customer. The previous posting showed the value of customer referrals and how these can affect the Customer Lifetime Value. Some experts recommend that projected margins from referred customers should be taken into account when making the decision as to how much to spend to acquire a new customer, others do not. The conservative approach is to not include the income however, if the company has a managed, historically accurate, referral scheme in place then some part of the referred customer margin can be safely included.
4. Knowing the CLV/NPV and buying into the whole loyalty philosophy changes the way marketing plans/budgets are developed. Referral and retention concepts become the major part of the marketing strategy. Often this reverses the typical allocation where 70%/80% of the budget goes to acquiring new customers to one where the majority of marketing funds go to building business with and through existing customers.
5. Just to mention another concept, too complex to discuss in detail here, but fascinating never-the-less. What is the true value of a company? The usual accounting type answer talks of balance sheets, P&Ls and other financial data – I, and others, believe that the true value of a company is better defined as the sum total of the company’s CLVs + the sum total value of the ELV (Employees Lifetime Value). A discussion for another day.
Frank Friend email friend@ffauk.com
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