Why I rate a recent CLV analysis as only ‘half-truth’
One of our team recently spotted this very neat infographic on customer lifetime value (CLV). A debate ensued amongst us on the pros and cons of this approach. For me it’s a ‘half-truth’ at best – intellectually appealing but not holistic.
The basic idea of Customer Value or Customer Lifetime Value makes some sense – you should know who your most profitable customers are and win/grow/retain them. Obviously companies should do this, right? But the problems come in making this a reality, and because there may be more effective alternatives:
1. To know who your most profitable customers are with any accuracy, means knowing for all customers, the products, services, the channels they useand the interactions they have. You need to know that one customer calls a call centre 5 times a week and another once a year. Then you have to know the activity based costs of all of their activities and all your products and services. Doing all these calculations costs a great deal of time and money in CRM, accounting and analytics. In practice, the analysis is always full of assumptions and approximations.
2. Once you’ve got the CV model worked out, then you have to apply it. This means being able to offer differential service. If Bob is more profitable than Steve, how can I recognise Steve coming and divert him, selectively and in real time, away from my stores or higher cost call centres? How do I get rid of him as a customer? How do I stop another ‘Steve’ becoming a customer, before I have any data about his behaviours? Not easy. We’ve implemented differential service for several clients – it can be done, but again, it’s costly and you have to know it’s going to be worth it.
3. All customer investment dollars are not equal. To say ask ‘would you spend your last dollar retaining or winning a customer?’ is a meaningless question if you can retain a customer for $1, but acquiring a new one will cost you $5. (Costs of advertising, sales, set-up). The real question is would you rather retain 5 customers or win a new one?
So, once you recognise the effort and challenges of the above, it’s worth looking at alternatives to CV or CLV before deciding to proceed. If your organisation can move 10% more transactions online, or remove unprofitable legacy products, or make all customer service more efficient, then that will on average make all customers more profitable. The bottom line improvements will be the same, without having to work out which were the ‘good’ or ‘bad’ customers. (Which is a concept I’m not sure I agree with anyway.)
With the recent election in Australia, I’ve been reading http://www.politifact.com.au/, so on that theme I’ll rate this one a ‘half-truth’!
