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Why determining customer lifetime value is critical to profitability in the digital age

17th Feb 2015
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In the modern digital age, you may think that making the maximum use of every available channel is the way forward, but in reality, businesses should be focused on knowing their customers and reaching the right ones. With the continual increase of mobile, social and web marketing tactics now available, there are numerous ways for businesses to find and connect with virtually any potential customer, but what many businesses fail to consider is whether they really should connect.

Critical to using digital technology most effectively is understanding customer lifetime value (CLV), which helps businesses know which customers to concentrate on. CLV measures the profit margins over the life of a customer, from initial interaction throughout the continued relationship, rather than simply the revenue generated. A CLV model can also enable companies to establish the point in which a relationship with a customer becomes profitable and with this knowledge, long-term strategies, financial forecasts, retention programmes and marketing budgets can then be planned.

This is important as customers producing large revenues may actually not be worth the investment needed to retain them. Often, customers, and similar target markets that generate revenue, cost more money to acquire, service and maintain and therefore the revenues they do produce are eaten-up reducing their overall profitability.. Alternatively, customers or prospects who generate more moderate revenues may, in fact, turn out to be highly profitable when their CLV is calculated.

While companies can create a model for determining CLV and use that information to decide which customers to prioritise, and which to largely ignore, that does not mean the business cannot affect CLV. If a customer’s initial CLV shows they have future potential, a company can then work to extend their value to the business for even more profit.

Customer journey

Key to extending CLV is providing a better customer journey, which encompasses the overall combination of experiences a customer has had throughout the entire relationship; from first contact, to receiving marketing and sales communications, to buying, to after-sales service. The value of customer experience was highlighted in a recent report by Econsultancy, which found that 64% of companies rate customer experience as the best tactic for improving CLV. Additionally, Walker Research underlined the importance of customer experience in a study predicting that, by the end of the decade, customer experience would overtake price and product as the key brand differentiator, while Deloitte’s has found that 82% of consumers view customer experience as a competitive differentiator.

To successfully implement a positive customer experience strategy, companies need to provide employees with the tools to do so. Having an integrated and flexible customer relationship management (CRM) solution in place that captures and provides instant access to relevant records, data and business intelligence, ensures employees at every touch point can contribute to a more positive customer experience. This includes the collection of all data from every interaction such as preferences, customer needs, communications and transactions. If a company continually bombards customers or prospects with too many messages, ill-informed communications, or calls when they have requested not to be contacted, then the overall experience will be a negative one.

CLV and customer experience are inextricably linked to customer retention, the importance of which is outlined in research by global management consultant, Bain and Company, showing that just a 5% increase in customer retention can have a 75% increase in company profitability. However, not all customers are equally profitable, nor do they have the same profit potential: Gartner Group statistics show that 80% of a company’s future revenue will come from 20% of its existing customers. Thus, identifying segments and striving to retain those with the highest CLV and then working to grow their value is crucial to future success.

Here are the main steps businesses can take to do that:

  • Complete a simple CLV analysis on all existing customers. A simple model can be adopted to identify your best existing customers, prospective customers that match their profile, generally good customers and those prospects and clients who are not and never will be profitable.
  • Use data to create a retention plan for each segment. Every customer should receive excellent service, however, after completing the CLV analysis, you can use the data to segment according to customer worth, creating a separate retention strategy for each segment according to the projected value. The service levels for each customer should not be different, but marketing and sales is where the real differentiation occurs as more focus is put into higher value clients.
  • Ensure prior knowledge of all interactions for good customer experience. A relationship with a prospect can be tarnished before it has even begun if employees aren’t armed with the information that they need. The use of marketing automation software to trigger communications based on customer behaviour is considered one of the most impactful ways to grow a successful relationship. Once a prospect becomes a customer, plan your communications and assign your marketing budget according to the projected profitability of the customer.
  • Social CRM in the digital age. Expectations from modern consumers now include service to be delivered across the range of channels and platforms available, especially social media. Every company looking to embrace a modern customer-centric approach should have a strong online presence and proactively handling customer service via social media management tools can help deal with issues quickly. Social CRM helps businesses to manage a variety of platforms, spot problems online and respond more quickly to issues.
  • Profits boosted by loyalty. As shown above, customer retention, which will boost profits, begins from the first point of contact and continues throughout the entirety of the relationship. Continually exceeding customer expectations will help gain loyal advocates, and in the digital world, a happy customer can become a brand evangelist, promoting your company online and introducing it to new prospects (as opposed to socially damaging your brand). Additionally, the more loyal a customer is, the more likely the opportunity for upselling and cross-selling.
  • Streamline processes. Manually undertaking tasks such as logging calls, updating records and scheduling follow-up reminders can eat up employees’ time, making them less productive. Automate these tasks: CRM software will record and track this type of information automatically and subscribe customers to specific campaigns with a few clicks.

It is important to remember that CLV is about profit margins and not revenues. Failing to understand and maximise CLV and to implement a retention strategy focused on your most valuable and loyal customers, exposes a company to inefficiency and unproductive budgeting. In addition, losing and replacing a customer is far more expensive than retaining one, so ensuring a positive customer experience is vital.

Mike Richardson is managing director EMEA, at Maximizer CRM.

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