The hyper competition has putting hard efforts both on strengthening the customer relationship management to making more financially accountable. One of the most significant aspects of profitability in current hyper competition is the lifetime value of “free customer‟. However along with the battle for customer, most of the organizations still have problem in sustaining their lifetime value of “free customer‟. The age of the customer is a heady time for marketers. As firms realize that customer obsession is key to competitive advantage, they turn to marketing to help drive obsession and to truly understand and engage their customers. The biggest challenge organizations face in the quest is forecasting which customers will yield the most profitable revenue in return for the investment of scarce marketing and customer experience dollars.
Customer lifetime value (CLV) stands out as a predictive approach because it brings profitability into the picture. CLV is a complex, powerful metric that gives firms, and specifically their marketers, a way to understand the financial impact of customer relationships over their forecast lifetimes. Customers with a high propensity to buy or with high revenue-generating potential may not always generate the highest profit and vice versa. The CLV helps the marketer to formulate an effective strategic marketing by addressing the following issues –
Shows what the customer acquisition spend should be
Helps to find the actual value of customers beyond statistics like NPS, engagement, clicks, etc.
Dictates allocation of marketing resources
Helps evaluate campaign ROI
Sanity check for sales forecasts
Helps prioritize customer metrics that contribute to customer-based corporate valuation
CLV in Customer Segmentation
Customer lifetime value focuses on the customers’ behaviors. The main idea of customer lifetime value is that customers should be judged on the basis of their profitability for the organization1. Today, the organizations tend to customer-oriented, so customers are considered as an important asset that is invested for in organizations. Customer lifetime value is a measurable asset. Using the concept of the customer lifetime value as a customer segmentation feature allows organizations to spend their time, capital, and energy for customers that are hoped to be profitable and increase cash flow.
Since different groups of customers require different marketing combinations, segmentation is necessary in marketing strategies. Statistical, social, and economic segmentation based on age, sex, marital status, income, occupation, education, religion, social class, etc. assumes that these variables have an impact on customer behavior, and can be used as representatives for analyzing direct needs. The CLV approach for market segmentation helps to understanding the market segments through causal factors rather than descriptive factors. The basis for this segmentation strategy is that benefits that people seek in consumption of an offered product are the main reason to create real market segments. The CLV based benefit segmentation implies specific marketing policy for individual segment.
Benefit analysis allows a building society or bank to concentrate its marketing effort on its strengths, and to target benefit segments in keeping with them. That is, different segments are suitable for building societies and banks with particular marketing strengths.
CLV in Customer Acquisition and Retention
The acquisition and retention of customer is a fundamental aspect to which every company seeks a strategy to address. The CLV metric suggests that retaining profitable customers increases the firm’s overall profitability, and it advocates that acquiring and retaining profitable customers should be the guiding principle. Customer lifetime value (CLV) stands out as a predictive approach because it brings profitability into the picture. CLV is a complex, powerful metric that gives firms, and specifically their marketers, a way to understand the financial impact of customer relationships over their forecast lifetimes. Customers with a high propensity to buy or with high revenue-generating potential may not always generate the highest profit and vice versa.
By identifying the high and low CLV customers, customers can be classified into a two-by-two matrix that implies several segment-specific marketing strategies to the firm. It was suggested different researchers that minimal spending should be allotted to the customers with low CLV scores and high current SOW. For customers with high CLV scores and high current SOW, the current level of spending should be maintained. Customers with low CLV and low current SOW should be encouraged to cross-buy from different product categories and higher-valued products. In the case of customers with high CLV and low current SOW, firms should take measures to stimulate those customers’ interests by cross-selling across different product categories and promoting higher-value purchases.
On the basis of “Customer Value” and “Share of Wallet”, a practical demonstration can be develop to determine how a company can implement a resource allocation strategy. The below figure illustrate how company can allocate its resources by segmenting customers based on their current SOW and CLV.
One major challenge in implementing CLV lies in transforming a firm’s focus from product-centric to customer-centric marketing. While the basic philosophy of the product-centric approach is to sell products to whoever is willing to buy, the customer-centric approach advocates serving specific customers, thereby providing customized services to customers. The shift in focus is from products to customers. For a firm to be customer-centric in its approach, interactions between firm and customer, between customers, and between firms are essential. The net aggregate of all such interactions, known as interaction orientation, helps firms develop organizational resources for successful management of customers.
Read the First Part of the Article: The Battle for Customer: Fundamental of CAC and CLV (First Part)
Read the Second Part of the Article: The Battle for Customer: Fundamental of Share of Wallet (Second Part)