Understanding Customer Lifetime Value
Posted By: Yaron Assabi
Customer lifetime value (CLV) is referred to as the economic value that is a prediction of the net profit attributed to the entire future relationship with a customer. The value of a customer is predicted based on transaction, customer experience, intent to purchase and the probability of up-sale or cross sale to the customer throughout the customer lifecycle. A commitment to nurturing long term customer relationships shape the profitability in each stage in the CX lifecycle.
Customer Lifetime Value is often calculated at a fiscal level but the actual value of a customer should not only be attributed to transactions but also behaviours that demonstrates advocacy such as positive product reviews that may result in additional sales from other customers, or referrals which increases the value a customer’s relationship with a brand. Social media has given a new platform for customers to express themselves and share their opinion with their social circle.
Due to the fact that mass advertising has lost credibility over the past few years with too many marketing messages trying to interrupt and capture the consumer's attention, it would appear that consumers have become immuned to marketing that is not personal or relevant and would rather trust their friends' opinions than a brand message.
Therefore word of mouth has huge influence on product or service success and we are seeing the rise of "influencer marketing" whereby brands target "opinion leaders" to increase awareness of the brand within the influencer community.
Customer lifetime value therefore needs to be assessed based on behaviour, spending habits, influence, and future purchase intent. In the past a retention strategy was only applied once a customer’s relationship is approaching conclusion, or when a customer is showing apathy, whereas today a retention strategy should be contoured to each phase in the CX lifecycle and applied at every interaction with the customer to keep them engaged with a brand.
Customer lifetime worth or net profitability should be calculated holistically at each phase of the CX lifecycle taking into account different types of customer behaviours that will produce different values within each of these phases.
Customer segmentation or persona profiling, can address these differences through a personal approach to customers, recognising their unique motives and needs when developing a relationship with a brand. The understanding of the "real" value of customers and personalisation of customer experience will lead to advocacy and will yield a profitable and long term relationship.