I've always been a fan of Customer Lifetime Value. By putting a financial value on customer relationships, it makes it easier to convince businesses to look after existing customers. But I still find it has more to offer than most businesses realize.
For example, I recently came across a company that had just completed a major review using Customer Lifetime Value. They had identified their most valuable segments, using spend, frequency and retention to calculate revenue, less the costs of acquiring and servicing them. They had then reallocated their marketing expenditure, to look after existing customers in these segments and to focus on acquiring look-a-like customers.
All well and good, a textbook example of using Customer Lifetime Value to improve profitability. But I've also found it powerful to go beyond just analyzing current lifetime value, to ask how we can make these customers more valuable over time. This then opens up thinking in three key areas:
1) How can we leverage their word of mouth? This is often missing in CLV calculations, as it can be difficult to identify. Yet studies show that referrals are normally the largest or second largest source of value from loyal customers. Indeed, some argue that with the rise of social media the concept should be amended to Connected Customer Lifetime Value or Customer Lifetime Network Value, in recognition of the influence customers can now have on others. Asking how we can create more value from customers makes sure that ideas for generating greater advocacy and referrals are considered, as well as forcing a reconsideration of the original CLV calculations.
2) How can we improve their customer experience? This is another major area for value creation, as a positive and consistent experience over time creates greater loyalty. It brings up ideas for removing friction across the customer journey, for making the experience more personal, and for making the marketing itself more useful. The Starbucks app that integrates rewards, mobile payment and ordering does all of these, for example, and has resulted in existing customers becoming more valuable. However, a key consideration that usually comes up is how to get better data or input from existing customers to enable improvements to happen.
3) How can we provide them with new products or services? While the immediate discussion tends to explore upselling customers, this also prompts thoughts on how to work with customers to create new products and services. My Starbucks Idea and Lego Ideas are both celebrated examples where customers have submitted and voted on ideas that have resulted in new products.
Of course, all this requires a willingness to invest in customers. But there's a more fundamental point. Rather than treating customers as assets to be exploited, think of them instead as partners in creating their lifetime value. What better guide to future investment could there be...?