How are you measuring your Customer Lifetime Value (CLV)?

I was again pumping up my knowledge base by reading and participating in some discussions on LinkedIn.  BTW, if you haven’t tried this, I highly recommend it.  Many knowledgeable people are there sharing their experiences and we all can learn a bit more.   I came across a topic that stood out to me.

Zaheer Gilani started the discussions and pointed out one important factor that we should all consider perhaps?

Do you measure CLV for your business – what are the best practices for working out a reliable value/figure?

So I started to read the discussion and found some interesting points that I would like to share with you.

David Leshem who is a part of TRI said “Customer value can be defined as the act of Balancing the cost to support a positive customer experience with value of the customer is essential to maximizing long-term company benefits.

There are numerous CVI (Customer Value Indicators)
In a transaction rich B2C business it can be addressed by the following CVIs:

Opportunity CVI – Opportunity to up-sell/cross-sell to the customer
Example “Desired” customer = “high-use” customer, has purchased only one product/service, and have spent a limited amount to date.

Profitability CVI – Impact the customer has on profitability
“Desired” customer = Buys high margin products and pays invoices on time.

Tenure CVI – Historical and future value of the customer
“Desired” customer = Longer-term customer, high revenue producing, whose monthly purchases/invoices are increasing.

Maintenance CVI – Impact of customer maintenance
“Desired” Customer = Requires minimal service support – low number of complaints or inbound customer care request dispute

There is Tactical, historical-based CVI
Example – Who has the most calls into customer care?
OR
Strategic CVI , prospective, value-based.
Example – What segments should receive the most lenient adjustments? Who are our greatest opportunities for maximizing value?

As for CLTV formulas, there are numerous CLTV formulas
The underlying principal is that Customer value has tight linkage with risk of migration and future cash flow

Customer lifetime value = Past value + Future value.
Past value – Known but irrelevant, serves as a possible reference for prediction
Future value – Unknown – especially the churn probability and cash flow

A simplified CLTV formula is
V = Sigma (over n) F(n)*D at (power of n) * (1-P) (power of n)
Just to understand better the economics of customers lifetime

Theory vs. Reality:
Theory:
V = lifetime value
F=net cash flow
D=discount rate
P=probability of churn

Reality:
P – Probability of churn is not really known
F – Future cash flows are not really known
P- Churn is often so high as D becomes irrelevant

CLTV emphasis becomes on Predicting and Controlling cash flow, it is essential to reduce churn and guard the revenues.”

These were some excellent points that I found very interesting.  This can have much value for the call center and customer service department.  The theories can be transferred well and help, build a better department with an excellent service.

Then Mike Salowey chimed in and asked great counter questions.  He asked “It will be interesting to see replies with “formulas for CLV” from different markets and industries. Do you think there will be differences for B2B and B2C for Customer loyalty? i.e. how many years will a customer continue to be a customer.”

That got me thinking…are all customers the same?  Certainly the way we treat customers is the same, so why differentiate between B2B and B2C?

Perhaps it’s not.  Customers pay for a service or they need help with the product, and therefore expect help.  So you have to offer it.  The service we offer must be to a level that we would want to be served.  It’s simple – Offer empathy, knowledge and a general great service and you are set. How are you measuring your Customer Lifetime Value (CLV)?

 

I was again pumping up my knowledge base by reading and participating in some discussions on LinkedIn.  BTW, if you haven’t tried this, I highly recommend it.  Many knowledgeable people are there sharing their experiences and we all can learn a bit more.   I came across a topic that stood out to me.

Zaheer Gilani started the discussions and pointed out one important factor that we should all consider perhaps?

Do you measure CLV for your business – what are the best practices for working out a reliable value/figure?

So I started to read the discussion and found some interesting points that I would like to share with you.

David Leshem who is a part of TRI said “Customer value can be defined as the act of Balancing the cost to support a positive customer experience with value of the customer is essential to maximizing long-term company benefits.

There are numerous CVI (Customer Value Indicators)
In a transaction rich B2C business it can be addressed by the following CVIs:

Opportunity CVI – Opportunity to up-sell/cross-sell to the customer
Example “Desired” customer = “high-use” customer, has purchased only one product/service, and have spent a limited amount to date.

Profitability CVI – Impact the customer has on profitability
“Desired” customer = Buys high margin products and pays invoices on time.

Tenure CVI – Historical and future value of the customer
“Desired” customer = Longer-term customer, high revenue producing, whose monthly purchases/invoices are increasing.

Maintenance CVI – Impact of customer maintenance
“Desired” Customer = Requires minimal service support – low number of complaints or inbound customer care request dispute

There is Tactical, historical-based CVI
Example – Who has the most calls into customer care?
OR
Strategic CVI , prospective, value-based.
Example – What segments should receive the most lenient adjustments? Who are our greatest opportunities for maximizing value?

As for CLTV formulas, there are numerous CLTV formulas
The underlying principal is that Customer value has tight linkage with risk of migration and future cash flow

Customer lifetime value = Past value + Future value.
Past value – Known but irrelevant, serves as a possible reference for prediction
Future value – Unknown – especially the churn probability and cash flow

A simplified CLTV formula is
V = Sigma (over n) F(n)*D at (power of n) * (1-P) (power of n)
Just to understand better the economics of customers lifetime

Theory vs. Reality:
Theory:
V = lifetime value
F=net cash flow
D=discount rate
P=probability of churn

Reality:
P – Probability of churn is not really known
F – Future cash flows are not really known
P- Churn is often so high as D becomes irrelevant

CLTV emphasis becomes on Predicting and Controlling cash flow, it is essential to reduce churn and guard the revenues.”

These were some excellent points that I found very interesting.  This can have much value for the call center and customer service department.  The theories can be transferred well and help, build a better department with an excellent service.

Then Mike Salowey chimed in and asked great counter questions.  He asked “It will be interesting to see replies with “formulas for CLV” from different markets and industries. Do you think there will be differences for B2B and B2C for Customer loyalty? i.e. how many years will a customer continue to be a customer.”

That got me thinking…are all customers the same?  Certainly the way we treat customers is the same, so why differentiate between B2B and B2C?

Perhaps it’s not.  Customers pay for a service or they need help with the product, and therefore expect help.  So you have to offer it.  The service we offer must be to a level that we would want to be served.  It’s simple – Offer empathy, knowledge and a general great service and you are set.

Stefanie Amini
is Specialist in Customer Success and chief writer and editor of I Want It Now, a blog for Customer Service Experts. Follow her @StefWalkMe