As part of the ongoing effort to differentiate products and services, best-in-breed organizations are now using a tool called Customer Lifetime Value (CLV). CLV is “a marketing metric that projects the value of a customer over the entire history of that customer's relationship with a company.”
Leveraging Customer
Lifetime Value to Increase
Return on Marketing Investment
(ROMI)
By Chris CheccoSeptember 20, 2006Customer Chemistry Leveraging Customer Lifetime Value to Increase Return on Marketing Investment (ROMI) 2
IntroductionAs "one-to-one marketing" begins to permeate mainstream businesspractices, organizations in highly competitive and saturated markets struggle to gain an advantage over one another. As part of the ongoing
effort to differentiate products and services, best-in-breed organizationsare now using a tool called Customer Lifetime Value (CLV). CLV is "a
marketing metric that projects the value of a customer over the entire history of that customer's relationship with a company." *Customer Lifetime Value is an appealing marketing metric because it allows companies to know approximately how much each of their customers will be worth in dollar terms, giving them the ability to spend
their dollars with visibility of the short- and long-term returns.
Components of Customer We will provide one basic formula, and focus Lifetime Value mainly on the potential uses of CLV. The calculationThere are various calculations for CLV, depending below (see Figure A) simply computes the presenton the nature of the customer relationship. Some value of future customer profit.calculations include value that a customer hasalready generated (booked Net Present Value- Let's begin by exploring the typical uses ofNPV); other calculations include an indirect value Customer Lifetime Value within best-of-breedfor referrals. Organizations must evaluate CLV organizations. There are three basic ways to calculation options based upon the intended use. influence CLV:Those that use CLV extensively typically employdifferent calculations to address various needs. 1) Reduce costs2) Increase current revenue and profit streams3) Extend revenue and profit streams
Figure A. Calculating Customer Value
Customer Lifetime Value =Net Present Value [Lifetime Estimate* (Future Periodic Revenue - Costs)]
Lifetime Estimate is the remaining estimated life of a customer with the specified organization/service provider.Net Present Value is the future stream of benefits and costs converted into equivalent values today.This is done by assigning monetary values to benefits and costs, discounting future benefits and costsusing an appropriate Discount Rate (applicable interest rate weighted by a risk factor), and subtractingthe sum total of discounted costs from the sum total of discounted benefits.
*Source: WikipediaCustomer Chemistry Leveraging Customer Lifetime Value to Increase Return on Marketing Investment (ROMI) 3
Reducing Costs tives designed to decrease fixed costs (or what areWithin any CLV calculation, there are fixed and typically considered fixed costs). For instance, avariable costs. The components of each cost cate- wireless telecommunications provider can assessgory depend on the industry and the organization- the direct change in profit resulting from a networkal infrastructure. For instance, in the wireless enhancement. A bank can perform a similar analy-telecommunications industry, fixed costs include sis to determine the cost-to-serve implications ofitems such as the per-unit cost to serve for a cellu- an operational enhancement, such as the additionlar call or a text message. In retail banking, fixed of a drive-through facility at all branch locations. costs may include items such as the cost perInternet transaction, cost per check, etc. When applied appropriately, CLV becomes astrategic tool for assessing top- and bottom-lineVariable costs can include promotional costs, such impact for large-scale operational or infrastructureas a phone upgrade in the wireless telecommuni- changes. Once the CLV framework is in place, ancations industry, or a short-term increase in interest organization can quickly estimate how much profitrate for a retail bank. will change related to an individual customer by"moving the needle" one unit of measure. Many believe that CLV implementations simplyfocus on changing variable costs or increasing rev- Retail Banking Case Studyenue. However, CLV can also be used to evaluate Let's assume that retail banks aiming to reduce coststhe financial implications of major corporate initia- want to drive customers to use online banking.
Figure B. Evaluating an Online Banking Offer
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