The digital age has provided marketers with an embarrassment of riches when it comes to finding ways to reach consumers. The trouble is that, in today’s rush to fully utilise the broad online, mobile and Big Data capability firms now have at their disposal, too few companies stop to consider whether they should do so in every case. This is where understanding Customer Lifetime Value (CLV) becomes critical to marketing strategy and execution.
To ensure a good return on marketing investment and higher profits, organisations need to determine the projected CLV of potential or existing customers before investing in new business or retention activities aimed at specific consumer segments. Otherwise, strategic planning, financial forecasts, budgeting, new business development and retention programmes can be thrown off balance.
The key point about CLV is that it gauges profit margin over the life of a customer rather than simply focusing on revenue generation. The reality is that some customers producing substantial revenues might not actually be worth the investment needed to attract or retain their business because this cost of servicing the client is eating up profit margins. Conversely, certain clients with less flashy revenue figures will, in fact, turn out to be very profitable when you do a CLV calculation, as they prove to be relatively low maintenance and might even justify further investment if it promises to expand the relationship.
Another important point about CLV is that it the method used to calculate it can be dynamic. It is essential for evaluating whether a prospect or customer is worth investing time and resource in, but it is not a fixed valuation that cannot be altered. When a CLV calculation indicates that a client is profitable and worth working to retain, companies can then look to increase the margin: the customer may provide scope for the sale of additional products and services that they don’t use currently, making investment in retention, upselling and cross-selling worthwhile.
Generating a higher CLV involves improving the ‘customer experience’, which means more than just providing superior ‘customer service’. An excellent customer experience requires that all points of contact with the client throughout the relationship, from first contact to nurturing to sales conversations to the delivery of service after purchase, contribute to an overall positive engagement with your brand.
Recent research underscores the role customer experience plays in maximising CLV while building your brand. Econsultancy figures show that 64% of companies rate a positive customer experience as the best way to improve CLV. Walker Research figures support a prediction that, by the end of the decade, customer experience will overtake price and product as the key brand differentiator while a Deloitte study reveals that that 82% of customers view their experience with a company as a competitive differentiator.
To ensure a positive customer experience, companies need to provide their employees with access to relevant knowledge, so that each interaction is informed, appropriate and reflects previous contact, as well as client needs and preferences. Irrelevant communications, repeated approaches when a client has already asked not to be contacted, demonstrate a lack of knowledge of prior interactions, and failure to understand the customer’s specific situation can damage a new, or even existing, relationship. So how does a company avoid this? Having a Customer Relationship Management (CRM) solution that captures and provides instant access to relevant records and business intelligence ensures employees, at every touch point, can contribute to a more positive customer experience.
CLV, customer experience and retention are all closely interconnected and understanding how they work together is critical in ensuring profitability. The importance of retention in maintaining and increasing margins is confirmed by Bain and Company research, which showed that a 5% increase in customer retention can result in a 75% increase in a company’s profitability. As noted however, not all customers are profitable and not all have the same potential for profitability. Gartner Group research indicates that in general 80% of a company’s future revenue will come from just 20% of its existing customers, so identifying those clients through CLV and working to build and extend relationships with them is critical to future success. To do that, companies can take a number of key steps:
- Complete a customer lifetime 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.
- Segment the data and create a retention plan – Using the CLV analysis, you can then segment the data according to customer worth, creating a separate retention strategy for each segment according to the projected value. Regardless of the value of customer, each should still experience the same level of excellent service when they interact with the company – it is in the marketing and sales where the real differentiation occurs.
- Send the right communications– Bombarding a prospect or customer with irrelevant and unwanted communications can be highly damaging to the relationship. Marketing automation software that triggers logical communications based on client interactions and behaviour is a more impactful way of building a relationship.
- 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 by using CRM software which will record and track this type of information automatically and subscribe customers to specific campaigns with a few clicks.
- Use the media at your disposal– To meet the expectations of today’s connected consumers, companies need to have a substantial and varied digital footprint. Mobile functionality has become a must-have, and Social CRM is essential to quickly spotting and resolving issues that crop up online.
All of the above should be coordinated so that your business continually exceeds customer expectations with all interactions, winning loyal advocates with its customer-centric culture. In the digitally-driven marketplace of today, brand evangelists can spread the word to hundreds if not thousands – and in certain magical instances, millions – of prospects. Upselling and cross-selling opportunities are also far more likely when customers are happy.
For the customer-centric approach to yield a truly excellent customer experience, employees need the tools, including CRM software, to make the strategy work. Adopting a well-configured CRM platform that employees can rely on to support this customer-centric approach enables them to produce better marketing, sales and service interactions. A properly configured CRM system provides the detailed customer information and client intelligence necessary to deliver the level of positive customer journey that enables organisations to maximise CLV.
Organisations that fail to understand the importance of CLV and use it to increase and develop a company’s customer base put their profit margins at risk. An inability to recognise the most valuable customers will hamper any company’s ability to effectively target activities aimed at maintaining the loyalty of its most important clients, expanding sales to them, and prospecting for ‘more of the same’. Understanding and tracking CLV not only helps a company to channel its customer investment into the right segments, it enables the business to then focus on extending CLV where it has identified further potential.
