Calculating Customer Lifetime Value: CX Mini Masterclass – E22

This CX Mini Masterclass covers the concept of Customer Lifetime Value (CLV), how to calculate this, and why it’s an important metric for the CX profession. Show host and customer experience expert, Julia Ahlfeldt, will help you understand how to leverage CLV to demonstrate the ROI of customer experience and foster buy-in for customer-centric strategy. Understanding Customer Lifetime Value Customer Lifetime Value (CLV) is the monetary value – often measured in contribution to profit – that is derived from a customer during the course of that customer’s relationship with the company or organization. CLV is a great way to help executives conceptualize the financial upside of customer-centric strategies. One of the most prominent and respected thought leaders in the field of customer experience, Jeanne Bliss, often talks about how businesses should regard customers as assets, and customer lifetime value is a great way of positioning customers as assets because it associates a monetary figure with each customer. In episode 21, I interviewed Marnitz Van Heederden, who shared the inspiring story of how he kick started customer-centric change in his business by demonstrating customer value. How to calculate CLV To calculate this metric, one should look at the average profit yielded from each customer (or the revenue minus the costs) in a given year, multiplied by the average number of years that a customer is retained. If the relationships have a shorter time-frame, you could just as easily quantify this in terms of weeks or months, though most businesses can and should look at these relationships from a long-term perspective, so I recommend years as the unit of measure in most cases. CLV = average customer profit per year * average length of retention in years So if the average customer generates $100 of profit for the company each year, and normal duration of the customer relationship (aka retention) is 2 years, the mean CLV among the company’s customer base would be $200. It’s not a stretch to see how this approach helps CX professionals position customers as assets, which is important if you want the business to start making customer-centric strategy decisions. If you are stumped for how to quantify a profit figure for each customer, I suggest phone-a-friend to one of your colleagues in finance and ask for their help. You’ll want to gather the average revenue figures and the ballpark operating cost for each customer relationship. If the value of relationships is something that typically grows over time, you could also include this as a growth factor during the course of the average duration of the relationship. CLV = average customer profit in year one * (1 + rate of growth in customer profit each year) ^ average length of retention in years Best uses for this metric Customer lifetime value isn’t a magic number, but it does have a lot of potential applications, and can be very useful for demonstrating the ROI for overarching customer-centric strategies. Major department-level initiatives that impact customer spend, cost of maintaining the customer relationship and efforts that impact customer base growth or retention, should all roll up into CLV, so you can use this metric as a way to connect and unite broad customer-centric objectives into a bottom-line impact through CLV. I’d suggest looking for ways to utilize this metric in dashboards that are assessed alongside financial results in major business performance or strategic reviews. If you can tie major business change efforts back to CLV as either a projection or a post-mortem, that’s great. It will help executives and department leaders understand how their actions connect back to customer-centric strategy. Limitations Just be aware that customer lifetime value is slow to change, is a lagging indicator, and is influenced by a lot of different factors. It may be difficult to pinpoint how minute or incremental changes to the customer journey impact CLV, so don’t expect tweaks to the customer experience to make big waves with CLV. This metric has limited potential as a tool to quantify cause and effect from smaller scale changes. (But don’t worry I cover that in Episode 23!) If you want to delve deeper into the topic of CX ROI calculations, including an overview of popular methodologies and expert guidance on how to pick the right approach, be sure to check out my Ultimate Guide to the ROI of Customer Experience. Transcript Prefer to read? Here’s the transcript. Click to expand full transcript [Intro music] Welcome to Decoding the Customer, a podcast about customer experience and how to realize customer-centric change in today’s dynamic business world. I’m Julia Ahlfeldt, certified customer experience professional, business advisor, and host of this program. Thanks so much for tuning in to my first CX mini masterclass episode of 2019. If you’re new to the show, welcome. If you’re a returning listener, it’s great to have you back. Each month I publish four podcast episodes. The first episode of the month is a longer format interview episode, designed to share ideas about best practices and inspiring stories from leaders in the field of customer experience. During the rest of the month, I publish weekly CX mini masterclass episodes like this one, that are designed to be punchy, bite-sized overviews of key customer experience concepts and ideas for how you can help your organization thrive through customer-centricity. Whether you’re new to the field of customer experience, are preparing for the CCXP exam, or are a seasoned professional looking to brush up on a few basics, this series will help you improve your knowledge, skills, and performance to stand out as a CX professional. Today we’ll be exploring the concept of customer lifetime value, how to calculate this, why it’s an important metric for the customer experience profession, and how you can use it to demonstrate the ROI of customer experience. If you’re busy driving to work or out walking the dog while you listen to this, and hear something that you’d like to remember later, don’t worry about writing it down. You can find an overview of the key concepts we’ve covered today in the show notes for this episode, which are on my website, julia-ahlfeldt.com or decodingthecustomer.com. Seeing as we’re at the start of a new year and many people are busy reflecting on their plans for 2019, I thought it would be appropriate to explore the concept of customer lifetime value, as this is core to demonstrating ROI, something that is crucial to the success of any customer experience strategy. Most of us have learned at some point, and often the hard way, that we absolutely have to demonstrate the business value of customer experience management, otherwise our efforts will not be prioritized by business leaders. The good news is that customer lifetime value is a great way to help executives conceptualize the financial upside of customer-centric strategies. So, what is customer lifetime value? Simply put, it’s the monetary value, often measured in contribution to profit, that is derived from a customer during the course of that customer’s relationship with the company or organization. One of the most prominent and respected thought leaders in the field of customer experience, Jeanne Bliss, often talks about how businesses should regard customers as assets, and customer lifetime value is one way of positioning customers as assets, with a monetary figure associated with each. To calculate customer lifetime value, one would look at the average profit yielded from each customer in a given year, multiplied by the average number of years that a customer remains an active customer. If the relationships have a shorter timeframe, you could just as easily look at this in terms of weeks or months, though most businesses can and should look at these relationships from a long-term perspective. If the value of relationships is something that typically grows over time, you could also include a growth factor during the course of the average duration of the relationship. Again, if you’re having a tough time visualizing the calculation, don’t worry about it. I’ll include this in the show notes for this episode. Just go to my website and look for episode 22. So why is this an important metric for customer experience professionals to use? Well, because it ties customer-centric strategy back to a financial benefit. It demonstrates the value of each customer and therefore the business benefit to keeping customers. Each customer lost equates to a loss in profit, so it makes customer churn look like a very expensive proposition. For those who work in businesses that are highly focused on customer acquisition, customer lifetime value can also help demonstrate why it’s important to focus on retention as well as acquisition, because the profit from each customer usually grows over time. Now, how can you use customer lifetime value to demonstrate the ROI of customer experience management? As with many things in life, there isn’t a silver bullet here. Customer lifetime value can be very useful for demonstrating the ROI of overarching customer-centric strategies, but be aware that it is a metric that is slow to change, and there are countless different factors that contribute to customer lifetime value. So it probably isn’t the best metric for calculating sort of cause-and-effect style results from one specific campaign. I think that customer lifetime value is most useful as a metric to be included in strategic dashboards to be reviewed by senior leaders. Major department level initiatives that impact customer spend, costs of maintaining the customer relationship, or length of retention should all roll up into this metric. So use it as a way to connect and unite broad customer-centric objectives into a bottom-line impact through customer lifetime value. So there you have it. That’s my introduction to customer lifetime value. I hope that you’ve enjoyed today’s show. In next week’s episode, we’re going to look into how you can leverage your journey map to demonstrate ROI using customer lifetime value. Thanks for listening. If you’re enjoying this program, please share it with others who might be interested or head on over to iTunes and rate this podcast. This helps others find the show too. I’ll be back next Thursday, but if you have feedback, requests for future shows, or would like to get in touch in the meantime, you can send me an email, tweet, or LinkedIn message. My contact details are also listed on my website, julia-ahlfeldt.com or decodingthecustomer.com. Thanks so much for listening and I’ll be back next week. [Outro music] Want to keep learning about CX? If you’d like to checkout more of these CX Mini Masterclasses or listen to my longer format CX expert interviews, check out the full listing of episodes for this CX podcast. Decoding the Customer is a series of customer experience podcasts created and produced by Julia Ahlfeldt, CCXP. Julia is a customer experience strategist, speaker and business advisor. She is a Certified Customer Experience Professional and one of the top experts in customer experience management. To find out more about how Julia can help your business achieve its CX goals, check out her customer experience advisory consulting services (including journey mapping, CX strategy development, experience innovation, leadership workshops and CX ROI measurement) or get in touch via email.