Improve Profitability Through Customer Lifetime Value

“Focus on your best customers.”  “Go after the big fish.”  “Drive greater customer profitability.”

 

You have probably said some version of these statements to your team or have been given such mandates by your boss.  And at first glance, they are all straightforward.  little deeper reveals that words like  “best”, “big”, and “profitability” can be interpreted in different ways.

 

Customer lifetime value (CLV) is a single metric that gets rid of the ambiguity.  It incorporates sales revenue with all costs associated with each product or service sold.  Customers who buy low-margin products will have a lower CLV than customers who buy high-margin products.  Prospects who are likely to buy your products and keep purchasing them over time have a higher CLV than a “one and done” new customer.  Obviously, you want to spend more time, effort, and marketing budget and selling to high-CLV customers and prospects.

 

CLV is a forward-looking metric based on historical data, customer/prospect firmographics, financial modeling, and predictive data sciences.  It calculates the net present value of the future profitability of each individual customer and prospect.  It may be complicated but the roadmap is simple: The more CLV the better.

  Calculating CLV is not an easy endeavor (or else you would have done it already).  It requires a cross-functional team consisting of Finance, Sales, Marketing, IT, Operations, and Analytics professionals.  These groups need to work together to:
  • Define the vision and goals
  • Gather input from subject matter expert (SME)
  • Collect relevant source data
  • Build and validate the CLV calculation
  • Socialize CLV throughout the company
  • Develop, implement, and track CLV-driven strategies
  Once you have CLV calculated, for every customer and prospect, it can be leveraged in the following ways:
  1. Precise and aggressive product pricing
    1. Is a product that’s priced at a 40% margin delivering? Or, when you analyze recent sales and the associated costs, are you coming in at 30%?
    2. Improve overall company profitability through refined product pricing
  2. Aligning high-cost Marketing efforts with high-CLV
    1. Low-CLV get low-cost Marketing campaigns or less frequency
  3. Optimal Sales team allocation
    1. Instead of assigning Sales reps based on past sales or the number of opportunities in the sales funnel, have Sales focus on those customers and prospects that have the highest data-driven, forward-looking, CLV
  4. Executive effort and mindshare in the right places
    1. Key executives should focus support on efforts closing sales with high-CLV customers and prospects
    2. Stop wasting time with low CLV customers and push aggressively for the highest CLV customers
  5.  

    With CLV, everyone in your company can agree on which products, customers, and prospects to focus on to improve corporate profitability.

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