“The purpose of a business is to create and keep a customer” – Peter Drucker, Management Consultant.
Customer Lifetime Value (CLV) is considered one of the most important factors in determining a business’s present and future success. However, less than half of those surveyed for our research said they were able to measure CLV.
Our new Understanding Customer Lifetime Value report looks at the importance of using CLV and the benefits it delivers, as well as exploring the reasons holding some companies back from using CLV and how these can be overcome. The research is based on results from our subscriber survey, along with insights from interviews with senior executives working for brands and agencies including the Post Office, TSB Bank, RNLI, John West Foods, Bookdespository.com, Simply Business, DFS, APD Group, DMA, Optimove, Javelin Group, Merkle, Xerox Corporation, Netcel and Episerver.
For more insight, Econsultancy subscribers can download the full report, but here are several key themes and recommendations emerging from the study.
Defining customer lifetime value
Customer lifetime value (CLV) can be defined as the total worth of a customer to a business over the entirety of their relationship and the expected profits a company can hope to gain.
Whilst acquiring a large customer base is beneficial to companies, the adage that it costs less to retain a customer than acquire a new one generally holds true across all sectors. Research shows it is six to seven times more costly to acquire a new customer than retain a current one.
Companies should therefore be looking to the customers they already have and how they can retain them and generate more business from them. Evidence also shows that a 5% increase in retention rates translates into 25-95% improvements in profit.
The value of using CLV is to focus on finding, nurturing and retaining those customers which will ultimately generate the most value for a company in the long-term. Having a clear idea of CLV helps provide meaningful insights into how companies should invest their resources and highlight areas for improvement, particularly around the customer experience and product or service offering.
From our survey, key drivers for businesses using CLV include the ability to increase sales and profit, as well as being able to identify the most valuable customers, and channels to reach them. Having a better understanding of different customer segments and having the ability to prioritise the focus on customer service and satisfaction were also clear marketing benefits.
So what should companies take into consideration when thinking about using CLV?
Return on Investment (ROI) and CLV need to work hand in hand
The focus for many companies appears to still be more on short-term metrics such as ROI, although there is a recognition amongst those interviewed for the report that the two metrics need to work hand in hand.
Whilst ROI of campaigns and acquisition is considered important, a key factor is whether they drove behaviour towards acquiring the right customers and driving a high CLV.
Focus on the customer experience to drive greater CLV
One of the most effective ways to boost CLV is to increase customer satisfaction. Research from Temkin Group highlights that 86% of those who received a great customer experience were likely to repurchase from the same company.
By understanding their high-value customers, companies can prioritise the customer service they provide to these customers, understand how much to invest to solve their customers’ issues and quantify the value of customer satisfaction. Some companies provide a different phone number for these customers to call and hold different service-level agreements (SLAs) with call centres to enable these queries to be prioritised. Interviewees reinforced the need to have an endless focus on the customer.
Understanding of customer data and the customer journey
Having the right people who understand customer data, and having the tools and systems in place to be able to calculate CLV is seen as key. To fully understand CLV, interviewees highlighted the importance of having data centralised and a single view of the customer, as well as a good understanding the customer journey. This enables companies to properly prioritise their activities to will deliver the best CLV for their customers.
A company can also intervene if the actions of high-value customers start moving in the wrong direction. CLV can provide early warning signs of churn and encourage companies to look at the recovery of customers they could potentially lose and take action to prevent this.
The importance of management buy-in
The issues most often identified as hampering the ability to measure CLV are the lack of a CLV strategy, followed by the challenge of data silos and availability of quality data. There is a recognition that calculations can become complicated for CLV and for many there was a need to start small, keep it simple and demonstrate value.
Companies interviewed suggested having buy-in from the top is critical to giving CLV the recognition it needs as well as being supported across the business.
For more insight, download the new Econsultancy report: Understanding Customer Lifetime Value report.