Customer Lifetime Value (CLV) is concerned with placing a value of an individual customer’s present value to a company in terms of cash flow.
There a several aspects that make valuing a customer a complicated matter….
Identifying which customers to invest in is tricky. What you may define as the ideal customer today may change quite quickly down the track (Kumar, 2018). Adjustments to customer portfolios that may make CLV measurements more accurate may not be cost effective but can be extremely time consuming (Kumar, 2018). In the nature of the modern competitive environment, competitive actions may not prioritise customer retention and make this difficult to do with bigger-picture strategy plans.
Kumar (2018) sums it up with 10 questions marketers can ask when assigning their customers with an economic value, in what I believe is a very effective tool to provide greater detail to measuring CLV in any market:
- Which customers should we select? How many do we need?
- What is the relationship between repeat purchase and profitability? Do loyal customers expect lower prices?
- How can we most effectively (and efficiently) communicate (interact) with different customers?
- How does cross-buying impact on organisational returns?
- What is the next product that they customer is likely to buy? When should we time an offer to existing customers?
- Can customer attrition be predicted/prevented/managed?
- What is the impact of product returns on long-term value?
- How do customers use the different marketing channels? Can we manage this?
- What is the relationship between brand building activities and CLV?
- What is the relationship between customer retention and acquisition? When, how, and which new customers should we attempt to ‘acquire’?
Kumar, V (2018) “A theory of customer valuation: Concepts, metrics, strategy, and implementation” Journal of Marketing, 82 (January), 1-19.