Calculating the value of the customer lifecycle: the CRM and customer equity perspective

The value of the customer lifecycle looks at the investments we plan to make for the customers (retention, sales, promotion, customer service, whatever) and the return we expect from the customers. The value of the customer lifecycle (CLV) has everything to do with the present and the future. It is the present value (expressed in your local currency) of the expected future cash flows from the customer.

The problem with calculating the CLV this way is that it happens from a global perspective (customer base) and it is difficult to use to calculate the value of the customer lifecycle on micro levels like a marketing plan. Also, CLV calculation models often find there origins in rather direct marketing oriented activities and are less useful for customer investments that are more difficult to calculate (think branding for instance).

Return On Marketing Investment and the CLV

Another way to calculate the value of the customer lifecycle value starts from the micro levels, even individual marketing and sales actions. Despite what many unfortunately still believe, it also can be used to calculate and predict the impact of branding related activities. We are talking about ROMI.

ROMI, short for Return On Marketing Investment is based on the incremental return of every Euro, Pound, USD (or your local currency) extra that is spent in customer-targeted activities (so also future-oriented). It is primarily (but not solely) a financial parameter that can be used for making prognoses and for calculating the efficiency of running marketing and sales programs.

But in order to be able to do that, you need to have a well-implemented ROMI-program in your company. Although data from ROMI programs offer an excellent way to calculate and follow the value of the customer lifecycle bottom-up, there are many hurdles to take.

First of all, not so many companies use ROMI as a parameter and fewer use it on all levels, ranging from every individual campaign to the corporate level. Implementing such programs requires many cultural changes in the company and doesn’t happen overnight. And even with ROMI programs you often will need to make extrapolations, for instance for high-risk customer investments.

The CRM and customer equity perspective

You can also use your CRM programs to calculate the CLV, on a global and often also a micro level but here too there are many hurdles. An interesting approach, that combines the traditional way of calculating the CLV and Return On Marketing Investment as a financial parameter, is that of the ‘customer equity’, as explained in an article in the Januari 2004 edition of the Journal of Marketing by Roland T. Rust, Katherine N. Lemon and Valarie A. Zeithaml.

In their article, called “Return on Marketing: Using Customer Equity to Focus Marketing”, the authors describe the ‘Customer equity’ as the sum of all values over the total customer lifecycle of a company. Starting from that definition, they developed a framework to optimize the lifelong value of all customer relationships from a CRM perspective.

The ‘customer equity’ is the result of three important underlying parameters: the ‘value equity’ (the objective perception of a brand by the customer from a realistic ‘quid pro quo’ viewpoint), the well-known ‘brand equity’ and the ‘retention equity’ (that expresses the customer loyalty).

Improving (the value of) the ‘customer equity’ happens by working on and combining the various components (called ‘drivers’) of these three. For instance: you can raise the ‘value equity’ by giving the customer more, by making things easier for him etc.

Also the role of customer segmentation is important. The authors state that segmenting your customers should be done from the viewpoint of the long-term potential of the customers. Finally the article underlines the importance of ‘brand switching’ and even developed a model to calculate the possibility that customers will switch brands.

It’s an interesting, very future-oriented model (and that’s what CLV is about, remember) because of its clear focus on a customer-centric approach (note that ‘brand equity’ is one of the three underlying parameters of ‘customer equity’ and that’s a clear message from the authors about customer-centric thinking versus brand-centric thinking), its focus on ROMI and the clear role of customer segmentation.

Many solutions, many questions

There are other ways to calculate the CLV too. They all have their advantages and disadvantages and much of course depends of the type of company or industry (for instance: retailer chains versus B2B service firms). All the mentioned and other models have their specific historic roots that can limit their use in certain environments.

Choosing the best way to calculate the CLV depends a lot from the tools you have, the way you calculate your sales and marketing investments and how customer-centric your company truly operates.

And, after all, isn't the customer lifetime value about love as Chris Baggot once seemed to say in his book 'Email marketing by the numbers'?

Jean-Paul De Clerck is a 360° interactive marketing consultant, founder of the Fusion Marketing Experience and owner of conversionation. You can connect with him via Twitter.