Business Benefits of Customer Lifetime Value – The Process to Ensure Success
Thursday February 26, 2015, by Akankshit Kanungo
Much has been talked about the concept of Customer Lifetime Value in recent times. Though there has been a debate about whether or not it is a useful tool to adopt in the course of business to enable revenue growth, there have been organizations that have started realizing the importance of calculating the lifetime value. In a situation where companies need to stay ahead of competition, with technology there is always a better solution out there – there always is and there will be a new approach, a new disruption, a new business story – and customer lifetime value aids in such an effort.
Two of the major challenges which companies face today can be attributed to (a) estimating who the best customers are over the customer lifetime and (b) getting to know how the most valuable customers behave.
It is a well-known fact that retaining and organically growing customers is a far more cost-effective task than acquiring new customers. Customer lifetime value not only takes into account the acquisition cost, but also the retention cost, any discount rate over the entire lifetime. In short, customer lifetime value does define the financial value of each customer and places a lot of importance of strategic customer relationships. It actually indicates how much each customer is worth in monetary terms and going forward how the company should engage with the customer.
Customer lifetime value helps develop optimal strategies for customer engagement, develop understanding of potential value of a customer and enables the workforce to improve customer relationships proactively. Emerging businesses can deliver higher levels of service to more profitable customers and retain customers longer. No matter how lifetime value is computed, either as a score or a multiyear dollar value — organizations must determine how to use it in the marketing planning process to ensure success.
In recent terms, customer value not only means financial value, but also the influence a customer can create to drive business growth – leading to the concept of customer lifetime ‘influence’ value.
Based on the calculation of lifetime value, there can be various actions which an organization can take to increase revenues. Though the results will all point to a common goal of gaining a competitive advantage, few of the key actions can be as mentioned below:
- Effective Customer Segmentation: Customer lifetime value can help in better customer profiling and segmentation to offer customized services, lead to profile based dynamic pricing to gain the maximum possible revenues per customer; target customers based on value potential; increase forecasting accuracy and Lead Conversion Ratios through segmentation. It surely gives an indication of the worth of a lead, and the costs to be incurred to convert the same.
- Better Forecasting: Companies, on the basis of customer lifetime value can plan better for availability of the service or product by predicting future demand by customers. In turn, it helps to manage optimum investment in assets, Workforce and inventory based on future demands. It also helps in cutting down on productivity loss by guiding better resource allocation strategies. In case of multiple product categories, prediction of purchase probabilities for each product category can enable efficient allocation of resources translating into higher profits.
- Re-invent Loyalty Management: Customer lifetime value can be a good indicator for improving operational efficiency and reduce customer dissatisfaction. A better understanding of customer needs and behavior surely helps in improving customer loyalty for a longer period. Based on this understanding, companies can redesign their loyalty plans to make them more effective.
- Retention/Win Back of Customers: Customer lifetime value can go a long way in predicting churn and enable design of new programs to reduce attrition. Companies can prioritize on which customer to win back, design strategies and take necessary steps.
The most significant part of customer lifetime value is that it is not at all for any specific industry and rather spans across all industries. It is just a matter that the level of engagement and advantage might differ based on the business model in place. Though there can be a lot of assumptions which are accounted for in the process of calculating the lifetime value, ultimately organizations need to remember that at the end of the day, it is just a tool and not a strategy to enable better revenue growth opportunities.