Loyalty Management

CUSTOMER LIFETIME VALUE (CLV) Part 7.

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

  

CUSTOMER LIFETIME VALUE (CLV) Part 6.

Referrals

Most managers welcome potential customers who are referred by one of the company’s existing customers. The reasons are obvious and include:

1.    Referred potential customers are much more likely to become actual customers than prospects contacted in other ways, for example, advertising, direct mail or search engine clicks.

2.    Customers acquired via referral are more trusting of the company and are more likely to place larger initial orders.

3.    Establishment costs, on average, are lower for referred customers.

4.    And, most importantly, their acquisition cost is close to zero.

As will be discussed in future postings the more loyal customers are to the company the more referrals they will make compared to the simply satisfied customer. It is this fact that drives internal marketing plans aimed at the improving the 3 key elements of Customer Lifetime Value (CLV): retention and referral rates and purchases (share of wallet). The table below illustrates this point.

Virtually all companies get customers by referral so companies often take receiving them for granted. In fact referrals can be increased by implementing programs designed to encourage existing customers to refer others – central to these program is converting simply satisfied customers into loyal ones.

It is important to collect customer referral data so that the progress of referral programs can be monitored and so that this data can be used to improve decision making in, for example, marketing planning and budgeting. This data is part of the wider new customer data collection. The source of every new customer must be noted: from advertising, direct mail (specific initiatives), the internet etc. and of course referrals. This data will make possible vital information such as the cost to acquire a new customer by source and by continuing customer tracking to know the margin generated by customers by acquisition source. So, for example, the data can compare the cost of acquiring a new customer and the margins generated by the source,e.g. advertising, and direct mail essential data if resources are to be used in ways to create maximum profits.

The customer data required for potential customers acquired by referral includes:

1.    The existing customer who made the referral so that an appropriate “Thank you” gesture can be made.

2.    Tracking to determine if the referred potential customer became an actual customer.

3.    A running analysis to determine the % of referred customers who became actual customers.

4.    Thereafter tracking sales/margins to referred customers.

The importance of referrals and the different  contributions made by satisfied vs. loyal customers is illustrated by the following table.

 

Satisfied vs. Loyal Customers
	Satisfied	Loyal
Years with company	3	6
Referrals (sale closed) / year	1	2
NPV (Net Present Value)**	1298	2927
Lifetime Referrals *	3	12
Value of referrals @ $1,398	3894	15576
Customer Total Value (NPV)	5192	18503
* No acquisition cost ($100)
NPV = Discounted Customer Lifetime Value (CLV)
** NPV from table in the Sept 1 posting

The table shows both the increased NPV of a customer retained for 6 years vs. 3 years and the added value that accrues to the NPV of loyal customers because they often act as advocates for the company and refer more potential customers than do satisfied customers.

These change from company to company but the principle remains – that the CLV is greatly affected by the number of referrals made. Customer data, properly collected will indicate the number of referrals made by various customer segments.

Frank Friend

Email friend@ffauk.com

Next posting Sept 11 2008