First and foremost, the value of customers is that they are humans. This very basic fact should by itself be intriguing for businesses to transform their organization, culture, and business model to offer more of a human to human relationship. Now, I do understand that as businesses we are not there for charity. We are rather looking to increase the cash flow into our organization, reduce costs in order to make more profits by end of year. With no doubt, refocusing our model to be Human Centered and increasing Customer Satisfaction, will help us achieve our monetary targets.
Providing customers a more valuable experience will increase the value of your customers.
Going back to a more business perspective on the topic, and to get in alignment with the executive suite’s “show me the money!” orientation, the return on customer centered efforts, whether in terms of expenditure or in terms of needed time should be quantified.
Such quantification may not only be measured by the increase in total revenues and reduction of total cost, yet it needs to be measured on an individual customer level. While the total revenues give us insights about the success of a certain product, service or project, it will not by itself provide us with the value offered to a certain segment of customers or individual customers. And since we are moving more and more towards customization and personalization, there is a need to quantify the return on investment for the segment or individuals targeted by the outcome of our investment. Customer Lifetime Value can give us the needed insights for improving our personalization investments.
Customer Lifetime Value (referred to as CLV or LTV) is a well-known measure that calculates the net present value of the overall expenditure of a customer without the incurred costs like acquisition, unit cost of the purchased product, maintenance cost, retention, discounts, etc.
Developing a model to measure CLV can be challenging due to the variables that need to be taken into account and the availability of the infrastructure to collect the information about customers. As the CLV could vary depending on the industry, product diversity and information available about the customer, this post is not about giving a comprehensive and scientific view on how to calculate CLV. It rather highlights some of the variables that need to be looked at in order to understand the value of a customer. The variables are as follows:
CLV = Customer Spending – Cost to obtain & retain customer + Customer Influence.
1. Customer Spending
How much does the customer spend?
Whether in a supermarket, car dealership, cellular operator or any other business, it is usually easy to track the spending of a certain customer if you have a CRM system in place.
How often does the customer spend?
The frequency of spending varies depending on the type of product or service the business is selling. In a cellular operator or utilities service provider, the spending is done on a monthly basis. For a car dealership, the spending is less frequent.
How long does the customer plan to stay with us?
This may not be easily predicted. Yet, by looking at the time a customer has been with us and the change in the spending rate (positive or negative), we can assume how long the customer is willing to stay with us. It is usually safer to look at this time as a periodic value. Another way to able to predict if a customer stays with us is through regular surveys whereas we dedicate a section for loyalty and the intentions of a customer to stay for a period of six months, one year or even more.
Simple arithmetic, if a customer is subscribed to monthly bundle of $60 and will be subscribed for the next 12 months, then the annual spending of this customer is $720 + any additional out of bundle charges.
2. Cost to Obtain & Retain Customer
Cost needs to be accounted for when calculating the value of a customer and it can be looked at from three different perspectives:
How much does it cost to obtain the customer?
Part of pricing the product or service depends on the cost needed to acquire a certain customer. From the cost associated with advertising, to the cost of activating a service or direct resources needed to finalize customer acquisition, these incurred costs need to be accounted for and deducted when calculating the value of a certain customer.
How much does it cost to serve this customer?
As one of the outcomes of improving customer experience is to cut cost and reduce the effort of customers at the same time, it is often the case that organizations try to push customers to the cheapest service channels. The use of certain channels imposes additional costs in organization. For example, if a customer calls a call center or visits a company branch, the cost of servicing this customer is higher than the cost of servicing him/her on the company’s website.
How much does it cost to retain this customer?
Unless you operate in a monopoly, and you offer a need that no one else offers, you need to spend some efforts in order to retain customers. This ranges from continuously improving your offerings, coping with technological advancement or having Loyalty and Retention programs in with the investments and discounts required.
3. Customer Influence
The power of the customer to influence others, whether positively or negatively is becoming more and more important with the increasing power of social media. Today’s customers are more engaged and empowered, and this increases their value in terms of how they can assist into advocating for a product or a brand, or even assisting in causing damage by spreading a negative word of mouth.
How much is the customer able to influence others?
Measuring the Net Promoter Score (NPS) is a holistic measure that reflects how the company is doing in terms of building advocacy and offering a valuable customer experience. When looking at the value of customers, you need to look at the response of each customer to the below questions and incorporate it in the formula you are using to calculate the CLV of your customers.
Have the customer ever recommended or is willing to recommend me to others, and what is the reach of this customer?
Have the customer ever discouraged or will ever discourage others from doing business with me, and what is the reach of this customer?
In a recent post, “Ice Cup Breaking Customer Experience”, I gave the example of how a movie theater lost the accumulated amount of $160 (at the time of writing the post) because they charged me $2.6 for a cup of ice, and because they did not address my complaint. I felt both ripped off and disrespected.
My advice was that businesses should listen to the Voice of Customer, and consider the CLV instead of considering immediate revenues. If you listen to me and address my complaint, we will be having a two way communication and a “Human-to-Human” relationship. If you understand my value as a Human and as a customer you will be offering me a more valuable experience. Both outcomes will result in a long term relationship.
Improve the customer experience, build a Human-to-Human relationship, and cash flow will be a side effect!