CX leaders use a myriad of metrics like Net Promoter Score (NPS)®, Customer Satisfaction and Customer Effort Score. And although not all companies measure and prioritize it, the importance of customer lifetime value (CLV) is staggering. It’s the one KPI that is most indicative of the effectiveness of your customer experience (CX) strategy.
Customer lifetime value is, in many respects, the ultimate KPI. Each customer’s value links to the ROI of your investment in CX initiatives and overall revenue, two major factors in your organization’s success.
Customer insights leaders increasingly recognize the importance of calculating a more customer-focused metric like CLV and infusing it throughout their businesses.
—Forrester
What is Customer Lifetime Value?
Often referred to as CLV or LTV, customer lifetime value is a predictive indicator that aims to quantify the total worth of a customer over their entire relationship with your organization. It is the present value of all estimated future profits from a customer over the course of their relationship with your company.
Understanding the importance of customer lifetime value can help CX leaders make decisions in the context of each customer’s entire life cycle, rather than single interactions that represent a snapshot of the customer at a single point in their relationship with your company.
As Forrester notes, “customer lifetime value isn’t new, but it’s gaining traction as customer insights professionals seek to maximize efficiency, demonstrate economic value, and leverage advances in data management for strategic purposes like customer experience improvement.”
As a CX leader, your success relies on your ability to understand and leverage CLV.
Traditionally, marketers leveraged CLV to segment customers, tailor engagement strategies and allocate investments. However, this approach ignores the wide variety of interactions that impact lifetime value.
Today, businesses are reorganizing around the customer to stay ahead of the competition. CX leaders are going beyond traditional uses of CLV. Most importantly, they’re diving into the behavior that impacts CLV across a customer’s entire relationship with their business. In this way, they can more accurately predict future value and do a better job of prioritizing the initiatives that can increase CLV for every customer.
The Importance of Customer Lifetime Value: Explained
CLV > NPS, CSAT, CES, etc.
NPS, CSAT and CES are valuable metrics to include in your measurement plan. But at the end of the day, the success of your business is measured by revenue and profit. The revenue a customer brings to your organization depends on the value you deliver to them.
Metrics like NPS or CSAT are feedback metrics, often collected after specific interactions with your business. They represent a single customer interaction that is only one moment within a longer customer journey. Optimizing single interactions based on recent feedback might result in short-term wins, like an improvement in NPS after using a self-help channel. However, that assumes that incremental growth in NPS will translate into significant increases in value over the customer’s lifetime. In reality, that approach is unsustainable.
Lifetime value is the best metric for long-term planning. It tells you how much money your business can count on from each customer, in addition to how many months or years you can rely on it.
Customer lifetime value is a key metric that a business can rally around to understand long-term profitability.
– Forrester
Using CLV as a strategic benchmark allows you to identify high-value customers and informs your strategy for raising the CLV of low-value customers. Maximizing revenue and profit margins in the long-term starts here.
Lifetime value is based on the historical data points necessary to accurately predict future profit. The more accurate those predictions, the more likely you are to invest resources in the customers who provide the most value in exchange—and the more likely you are to reach goals crucial to the success of your team and your organization.
CLV is a Better Metric for Justifying Investments
Lack of budget and resources is the top challenge for CX professionals today. To justify increased investment, CX leaders need to make a data-driven case for new investments. Forrester writes that organizations “can apply CLV at tactical levels as well, boosting margins by enabling them to make investment decisions that they balance against potential return.”
Because it incorporates historical data and enables you to predict future outcomes, CLV helps you make a compelling, data-driven argument for future CX spending.
Analyzing customer experiences through the lens of CLV allows you to identify opportunities to optimize your CX strategy. It will also help you prioritize those initiatives based on the impact they will have on the KPIs that matter most to your team and your business.
CLV is a powerful and versatile diagnostic tool. It not only provides a clear view of a product’s or business’s financial health and value creation, but it also can guide decision making.
– Boston Consulting Group
Assessing Your Customers’ Value
Customer lifetime value calculations are typically more complex than other customer experience metrics because the method is highly dependent on your company’s business model.
In general, customer lifetime value is dependent on two primary factors:
- The average customer lifespan
- An estimate of future profits
Customer lifespan is the amount of time in which a customer purchases products or services from your business. The method you use to determine this timeframe will vary depending on your revenue model. For instance, do your customers enter into a contract or subscription that specifies future purchases? Or do your customers make discrete purchase decisions in a more unpredictable manner?
For a subscription business, the average customer lifespan is easily calculated based on churn rate. The average customer lifespan is simply one over the churn rate:
Next, estimate expected future profits. For example, in a subscription business, future revenue is governed by a contract. For other types of businesses like retail, future revenue comes from independent purchasing decisions that do not occur at regular, predetermined intervals. In these cases, you will need to take a probabilistic approach to predict the value of future transactions.
Because customer lifetime value is based on expected profit, rather than revenue, it’s essential to accurately identify all costs. Acquisition costs and service costs can be key CLV drivers, but there may be a variety of other costs associated with individual customer interactions. For this reason, successful CX teams regularly analyze customer journeys to pinpoint the interactions that increase costs.
Finally, it’s important to understand whether your company consists of a variety of businesses or offers a variety of products that have different lifespans and/or revenue models. In these cases, you will need to combine separate customer lifetime models for each business or product.
Why Take a Journey-Based Approach to Lifetime Value?
Part of improving CLV is understanding the various areas that can impact it. Having a deep understanding of the customer journey, the touchpoints within it, and the impact on lifetime value is necessary.
– Customer Gauge
McKinsey finds that “end-to-end customer journeys, not individual touchpoints, are the unit to measure when setting priorities for your customer experience investments.” Customer journey data is the key to understanding why customers have specific CLV ratings and how to improve them.
A journey-based approach goes beyond analyzing single interactions to see what drives customer value and reveals which journeys lead to the greatest CLV. This analysis will help you understand the root causes that lead to higher CLV and enhance your ability to identify the aspects of your CX strategy that require optimization.
Simply put, a journey-based approach helps you aim before you shoot. Understanding the bigger picture will enable you to narrow your focus and discover the best opportunities to enhance engagement and drive CLV in the long term.
In fact, a recent study found 90% of high-performing CX teams agree that a journey-based approach is important for determining customer lifetime value.
Start with “Why?”
Lifetime value is intrinsically linked to customer experience.
Revealing the “why” is essential to maximizing CLV and enhancing CX. For this reason, CLV is gaining traction with CX leaders, who recognize the importance of customer lifetime value as a unifying metric on the path to improved customer experience and profitability.
However, increasing CLV is not something that happens overnight. It’s just as difficult as it is crucial to drive CLV. But, there are incremental steps you can take today that will advance your CLV-related efforts in the future. The best way to achieve your goal is to understand customers fully, and there’s no better way to understand customers than employing a journey-based approach.
For instance, leveraging a journey-based approach will reveal journeys that negatively impact CLV, such as customers who churn. Analyzing all customer behavior uncovers not only which customers are likely to churn, but why. With that insight, you can mitigate churn by optimizing those customer’s journeys.
How to Leverage Customer Journey Analytics to Influence CLV
An understanding of customer feedback doesn’t tell you all you need to know about
Kerry Bodine, CEO at Bodine & Co.
your customers’ experiences. To get the full picture, you also need to understand
actual customer behavior. Customer journey analytics is an approach to insights and
measurement that examines customers’ behavior not just at individual touchpoints,
but along the paths they take as they attempt to accomplish their goals and tasks.
Co-author of Outside In
Customer journey analytics enables you to apply a journey-based approach and advances your ability to understand customer behavior. It connects millions of data points on every customer across channels and over time. Customer journey analytics software allows you to take a data-driven approach to managing, measuring and optimizing customer journeys.
Because these solutions work with your existing tech stack and ingest data from anywhere on any customer, you can follow your customer as they progress through their journeys. It’s this ability that enables root cause analysis, or revealing why customers behave in certain ways. Today, CX leaders are leveraging journey analytics to understand:
- Signals or indicators of journey success
- Journey-based KPIs and milestones
- Journey testing and optimization
- Journey orchestration
Using these methods enhances your ability to understand what influences CLV, in addition to predicting and measuring its impact on CX investments and overall business objectives. Above all, robust insight into customer journeys advances your ability to maximize CLV in the long-term—and enhance CX right now.
The Path Forward
Ultimately, customer journey analytics enable you to better understand and influence customer lifetime value. It helps you uncover the root cause of lifetime value by analyzing patterns of behavior within a journey-based context. Leading CX teams recognize the importance of customer lifetime value and leverage customer journey analytics to segment high CLV customers and compare their journeys to low-value segments. Using this insight helps CX leaders determine actions that will ultimately increase or decrease lifetime value.
Net Promoter, Net Promoter System, Net Promoter Score, NPS and the NPS-related emoticons are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.
A version of The Importance of Customer Lifetime Value for CX Leaders originally appeared on the Pointillist blog.
I appreciate the author acknowledging that measuring CLV is not new. Over thirty years ago I worked for a company that allowed me to prospect to a one penny, ten-year, lifetime value with a 15% hurdle rate. Another important part of a CLV calculation is CAC (customer acquisition cost). In my opinion there is not near enough attention paid to CAC which to a great extent is driven by prospect experience. The math is simple. Reducing CAC will increase CLV. You can reduce CAC by doing a better job of segmenting and doing what I call drilling for less expensive barrels of oil. You can also reduce CAC by avoiding turning off prospects by using what is commonly called mass personalization. Finally, going after larger, more profitable potential customers while reducing (if not eliminating) spend on lower ranking prospects is a no-brainer – yet this approach is inconsistently executed by most companies. Don’t forget CAC (and how to reduce it) when looking at CLV.