Tag: Customer Lifetime Value

The Indirect Value of a Customer

Posted on by The University Marketing Blog

Some measurements of customer value such as customer lifetime value (CLV) and customer profit (CP) aim to measure the direct economic value of a customer (Kumar, 2018).

As many of us understand, the customer’s value goes far beyond this with their indirect value they provide through their engagement with the brand and those around them.

The indirect value of a customer is generated through activities such as making recommendations (word-of-mouth), influencing others’ purchase decisions, and providing insights and feedback to a company (Kumar, 2018).

The TRUE overall value of a customer must take into account both the direct and indirect activities for the following reason:

A customer who frequently buys a product such as shampoo will have a far greater direct value to the company. But a customer who may infrequently buy the shampoo but influences 5 or more of their friends to buy the shampoo will produce a far greater indirect value and potentially overall value than the first customer.

Understandably, calculating these indirect values of a customer is an extremely complex task and is why measurements such as CLV and CP avoid accounting for them (Kumar, 2018).

References:

Kumar, V (2018) “A theory of customer valuation: Concepts, metrics, strategy, and implementation” Journal of Marketing, 82 (January), 1-19.

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The Importance of Customer Lifetime Value to Marketing

Posted on by The University Marketing Blog

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:

  1. Which customers should we select? How many do we need?
  2. What is the relationship between repeat purchase and profitability? Do loyal customers expect lower prices?
  3. How can we most effectively (and efficiently) communicate (interact) with different customers?
  4. How does cross-buying impact on organisational returns?
  5. What is the next product that they customer is likely to buy? When should we time an offer to existing customers?
  6. Can customer attrition be predicted/prevented/managed?
  7. What is the impact of product returns on long-term value?
  8. How do customers use the different marketing channels? Can we manage this?
  9. What is the relationship between brand building activities and CLV?
  10. What is the relationship between customer retention and acquisition? When, how, and which new customers should we attempt to ‘acquire’?

References:

Kumar, V (2018) “A theory of customer valuation: Concepts, metrics, strategy, and implementation” Journal of Marketing, 82 (January), 1-19.

Marketing Using ‘Customer Lifetime Value’ & ‘Customer Equity’

Posted on by The University Marketing Blog

In the previous blog, customer profit was discussed which is relevant to the past tense of customer’s behaviour. Customer Lifetime Value (CLV) is concerned with “the present value of the future cash flows attributed to the customer relationship” (Bendle et al., 2016, p159).

Essentially, by gathering information about a customer’s behaviours we can reflect on the information and cash flows associated with the customer to provide an insight and estimation of the future value they might bring to the company.

Calculating CLV becomes extremely simple in contractual situations given the predetermined nature of the contract’s agreements but can provide a good element to planning for future cash flow.

The difference between CLV and Customer Equity (CE) is that CLV is concerned with a customer on an individual level while CE provides a measurement of the value of all customers (Bendle et al., 2016).

CE is another element that can increase the accuracy of financial standings and would, at the bare minimum, compliment the current processes in nearly any organisation.

References:

Bendle, NT, PW Farris, PE Pfeifer & DJ Reibstein (2016) Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, 3rd edition. Pearson: New Jersey