One very common word when we discuss customer metrics is Customer Lifetime Value and how it’s useful to decide where to focus their energies.
However, there are some important points to ponder.
What is CLV?
Is CLV enough to talk about the ‘next’ step?
Are we measuring the impact referrals have?
Are we actually looking at the Customer Referral Value (CRV)?
Now with a base set, let’s ponder on these questions.
The scary formal definition and the layman one!
Customer Lifetime Value (CLV) is the present value of the future cash flows or the value of business attributed to the customer during his or her entire relationship with the company (Source)
In simple language, how much am I, as a business or as a company, going to earn from this customer during the entire period of time (lifetime) the customer is going to interact with the company. Here, now rather than the simple sum of the total amount earned from this customer across say, the next 3 years (assuming this is my business’ avg. customer lifetime), then what would be the value of that amount today?
To understand it further, think about it. Is the value of Rs.100 the same as what it was say 10 years back? No, it is not. Hence I would want to know exactly how much is the value of that amount today. So, the concept of calculating the Present value while measuring the CLV.
Now, for CLV one might find a lot of formulas. The most common among those is the following :
There are many ways to calculate CLV and the suitable ways can be chosen basis the resources and data the business has.
One could calculate CLV basis different approaches like (1) Historial approach (2) Predictive Approach (3) Traditional Approach
To understand it simply, we can say CLV = Lifetime Value * Profit Margin
If you want to have a detailed look at different ways of calculating CLV, this is a good read.
Now one can calculate the CLV for their business. However, is this simply enough information to segment or prioritize the customers? Aren’t we ignoring a very important metric?
Customer Referral Value (CRV). This is probably a little trickier than calculating CLV. Now, there could be two scenarios, one, the new customer would not have joined unless he or she had been referred so for us, the value of the new customer is their CLV. However, in the second case, there could be a new customer acquired through referral which anyways would have joined so here, I am basically saving my acquisition cost. So, for the second scenario, my value of that customer who would have anyways joined would be only the acquisition cost.
Now, we have CLV and CRV. It is quite possible a person who is low in CLV provides the business a very high CRV. Now, the perception of who is the ‘important’ customer changes slightly.
For me as a business now, most of my customer segments can be broken into priorities, analysis of how to move the customer from one segment to another (say from High CLV, Low CRV to High CLV, High CRV).
Good Reads | References :
- https://economictimes.indiatimes.com/definition/customer-lifetime-value
- https://medium.com/swlh/5-simple-ways-to-calculate-customer-lifetime-value-5f49b1a12723
- https://www.imanet.org/-/media/9d0e51bbdbf04a14b79a6d0a8289dfa8.ashx
- https://hbr.org/2007/10/how-valuable-is-word-of-mouth
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