Money talks. It motivates. It prioritizes. Money enables jobs and guides how we do them. So it only makes sense to allocate our efforts according to the source of money: customers. This is what customer lifetime value is about: giving the strongest voice in what gets done to customers who provide the greatest value to your company — and accordingly, creating the greatest value for them.
What is Customer Lifetime Value?
Customer lifetime value (CLV) measures the cumulative profit contributed by each of your customers and prospects during the entire duration of their purchases with your company. When everyone knows the potential value of a customer relationship, it affects decision-making as the upside of keeping and adding customers is considered, along with the downside of losing or causing pain to customers. This decision-making criteria are significant business advantages, and one of the keys to creating a solid customer-centric culture and customer experience strategy. This is why CLV should be part of your CX efforts from the very beginning, and used as a constant reminder as you build customer experience maturity.
Why is Customer Lifetime Value Overlooked?
CLV is a powerful, yet oft-overlooked, building-block for customer experience return on investment (CX ROI). Why?
- It’s perceived as inconvenient to calculate.
- It can be more exciting to buy a CX technology billed as the magic potion.
- Managerial levels/functions charged with customer experience may not have a holistic purview that values holistic quantification and prioritization.
- Some assume that popular customer experience management methods will yield strong, lasting ROI.
Our 4-year study of customer experience practices shows the mis-match of effort in brute-force customer retention versus using CLV as a means to achieve retention of customers (company-wide deployment 37% versus 14%, respectively).
CLV is practiced by less than half of companies, according to our study. Yet, CLV is not a new concept. It was talked about widely and with great excitement in 1990 through the Harvard Business Review article by Fred Reichheld and Jim Sasser, “Zero Defections: Quality Comes to Services”. Indeed, the interest in CLV led to the growth of CRM (customer relationship management) technology sales.
It may be that we collectively forgot about the essential building-block of CLV through the expectation of CRM automating CLV calculations, along with the frustration that ensued as CRM technology deployment outpaced people and process considerations necessary for its success. Our study revealed CLV as a success factor for CX ROI: companies that were calculating some form of CLV tended to be those that were enjoying stronger customer experience business results.
A Key to Customer Experience Return on Investment
We put together a series of stepping stones within the CLV building-block for CX ROI, as part of a customer experience maturity assessment and roadmap framework:
- Prioritize by customer revenue: a quick-and-dirty estimation is a good starting point, with characterization of high/medium/low revenue customers to guide decision-making and voice-of-the-customer weighting.
- Prioritize by customer value: an iterative process with successive levels of sophistication over time is essential for assigning variable costs, fixed costs, and other qualitative aspects of value to customers.
- Use CLV extensively: linking CLV and jobs-to-be-done is especially powerful for strategic and tactical decisions among every functional area, and in guiding your CX efforts as well.
CLV is actionable — it should guide lead nurturing, right-selling, cross-selling, right-size service levels, front-line and back-office attitude adjustments, complaint handling, voice-of-the-customer weighting, monitoring of customer behaviors, input to strategic decisions, and adjustments to policies.
Think of the strides you could make in conquering the chronic obstacles to CX ROI. CLV could be the impetus for a comprehensive customer experience strategy, with company-wide shared vision. CLV could be the key to freeing up much-needed budget, along with managers’ bandwidth and executive sponsors’ sustained enthusiasm.
If your objective is to build value through customer experience management, start with exploring the value you have! — both currently and potentially. Remind everyone, early and often, where the value they enjoy comes from. Prioritize customer experience management through CLV. And use CLV linked to customers’ expectations as a guiding light for your whole company’s increased success.
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