• Almost every company has a customer base that consists of a minority group who is responsible for its majority of profits. It is imperative to recognize this minority. In a study carried out by Joint Market Research, it was discovered by Procter & Gamble that 56% of its total revenue came from regular shoppers who constituted a minor 14%. The occasional shoppers group, which formed a major 86%, contributed only 44% of revenues. Further, many of the occasional shoppers did not exhibit any loyalty for P&G products.
• It is 5-10 times costlier to get a new customer
than to retain an existing one. Even more, companies on an average lose 20%
customers, annually, despite best efforts. Studies indicate that increasing
customer retention by 50% results in a profit increase of at least 25%.
Therefore, more focus should be on growing business by retaining existing
customers that bring in real value.
Customer differentiation should be based on a
judicious balance of the value the company creates for the customer and the
value the customer brings in for the company. But, how do you evaluate the
value of your customer? You do it by calculating his/her contribution to the
company throughout the customer life-cycle.
While the contributions of your customer to the
firm in the past are significant, these statistics alone should not form the
basis for calculating the customer’s lifetime value. Customer Lifetime Value
(CLV) is a reliable metric employed by organizations to evaluate the future
worth of a customer.
Customer Lifetime Value is the total of all the
financial profit a customer brings in for the firm, calculated from the
existing period to the future (revenues – costs incurred). Employing CLV, managers
can derive actionable information that enables them to design strategies for
customers that really matter in the long-run rather than focusing solely on
increasing short-term profits. CLV is significant as it provides the following
crucial insights:
• Any company has only limited resources and it
is natural to want to use it for customers that bring them maximum profits. To
allow such investment, you need to exactly know the cumulative cash flow a
particular customer would give you throughout his/her life-term. CLV equips you
with such information using you can know how much would go into retaining a
customer to maximize ROI.
• Once you recognize your most profitable
customers using CLV, you can optimize the allocation of your resources for
maximum profits. You can also customize your future marketing strategies for a
specific audience.
Relationships begin to fragment and cease to grow
when there are no mutual benefits for the parties involved. Therefore it is
important that you make your ‘most important’ customer relationships valuable
through effective retention while achieving your financial objectives.