Why your business should be tracking Customer Lifetime Value (CLV)
It is essential for every business to keep in mind the sentiments of their customers. If customers are happy, they are more likely to remain in the company’s ecosystem, remain loyal to the brand, defend its interests, and likely to recommend & promote the companies products among their peer group. Customer Lifetime Value (CLV) thus becomes a great metric to focus on when you have a long-term relationship with a customer, such as in the case of an Internet Service Provider. If a customer is happy, they tend to stick around for years and years. A loyal customer thus in a way becomes a ‘stakeholder’ in the company. Despite sounding remarkably like customer satisfaction, CLV can be significantly & quantitatively linked to revenue, and therefore differs greatly from the latter.
CLV is the total worth a customer provides to a company over the whole period of their relationship. It’s an important metric as it costs less to keep existing customers than it does to acquire new ones (Customer Acquisition Cost (CAC)), keeping in mind money spent on marketing, advertising, entry-level discount offers, and so on. In fact, an article published by Harvard Business Review, found that gaining a customer can cost anywhere between five and 25 times more than retaining an existing one. Additionally, a study conducted by Bain & Company found that a 5% increase in retention rate can lead to an increase in profit between 25% to 95%. Thus, increasing the value of existing customers is a great way to drive growth. Knowing the CLV helps businesses develop strategies to acquire new customers and retain existing ones while maintaining profit margins. At its simplest, the formula for measuring CLV is Customer revenue minus the costs of acquiring and serving the customer. It is important to keep CLV>CAC. Moreover, it is important to segment the client base to identify the most profitable customers and use analytics to learn how to get more like them. On the flip side, one can gauge customer behavior if they are losing interest in the product. For example, a customer is defaulting on payment repeatedly. Here, speedy resolution of whatever difficulties a customer might be facing becomes essential.
CLV is indirectly, yet closely linked to operational efficiency. If there are delays in time to market, products being out of stock for a long time, or even poor after sales support, there’s a likelihood the customer will switch to an alternative brand, resulting in a reduction of CLV. Thus, finely tuning operations is important. Identifying a proven working strategy is one of many invaluable management practices that can decrease costs, and determine the progress a business is making. For the same, it is incredibly important to understand and create operational metrics, and pay attention to them.
Operation metrics are different for every industry, for example for sales it can be lead conversation ratio, for a logistic company it can be delivery time, for a restaurant it can be time taken to prepare food. In customer care services, a feedback system in the form of ratings is a quantifiable metric. The rating system can provide insights on how quickly customer queries are being resolved. If a negative trend is observed, the company can focus on improving communications and consequently the time taken to resolve a query.
Acccording to Kirsten Newbold-Knipp, research director, Gartner for Marketing Leaders – “Marketers should identify the operational levers that have the greatest impact on lifetime value (LTV) and customer acquisition cost (CAC) and think about metrics along the entire customer life cycle that marketing can impact.”
