In our blog Data Is the Future, Right? So Why Are So Many CEOs Disenchanted With It?, we discussed some examples of how a business might behave differently if they were taking a more holistic approach to their data efforts. In this article, we highlight one of the most critical tools for unlocking the value inherent in your data: Customer Lifetime Value (CLV).
Most organizations employ some form of lifetime value in their decision making. Too often this metric is an average based on the entire customer base. It’s typically calculated by staff within a financial planning or strategy function, using whatever aggregated data is available from reports at the time. This average value is then employed for forecasting and market sizing exercises, providing an expected revenue based on some level of customer uptake. These generalizations can be valuable, in fact critical, to making informed decisions…and could mean the difference between losing or making money on a new product launch or market entry.
However, to really get the most from lifetime value, it’s not enough to just have an agreed upon average CLV. What a truly data-driven organization deserves is a CLV calculated for each customer independently. On the surface, this might seem straightforward. Sum up the dollar value of each customer’s transactions and voila, you have a lifetime value for each customer. But this approach would only give decision makers half the story. They would know how much was spent, but what about how much will be spent? Answering that question supplies enormous value and getting there requires an integrated approach to your customer analytics.
What is Customer Lifetime Value?
Customer Lifetime Value (CLV) can be defined as the sum of a customer’s past spending (‘Current Value’) and forecasted future spending (‘Future Value’), discounted in today’s dollars. Current Value (CV) is essentially 3rd grade math, while Future Value (FV) employs a statistical approach. The key to finding real insight is to blend customer-specific data from a variety of systems, creating a more complete view of your customer. For example, a transactional database may be able to provide a customer’s sales, but combining that data with customer service calls can highlight the true cost of servicing that customer. Revenue per customer is important (and a suitable place to start), but the closer you can get to a margin per customer the better!
Calculating Future Value
Calculating Future Value can vary based on your business or industry. For example, the hospitality industry puts a strong emphasis on predicting a guest’s likelihood to make a reservation and their propensity to remain a customer over time. This allows hospitality companies to generate a future spending curve based on past behavior. And those curves can adjust over time based on new customer activity, leading to a more robust Future Value forecast. The statistical approaches that can be applied go beyond the scope of this blog, but one place to start is by understanding the overall churn of your customer base and how spending patterns change over the course of a customer’s relationship with your brand. This could include leveraging demographic, geographic, or even psychographic data (via customer surveys) to further improve the predicted FV.
In the hospitality industry, for example, understanding whether a customer booked with the reservation for business or pleasure can help the company understand their potential for future purchases. When traveling on business, a customer may be less price sensitive and more interested in proximity to their meeting. Yet if the data shows that they never stay with your brand while traveling with their family, then Future Value will suffer. Creating a marketing campaign centered around these business travelers could help change that segment’s behavior in the future, leading to improved FV and higher margins for your brand. Marketing messages centered around the theme of “where business meets pleasure” or targeting that customer segment with family-oriented brands in your portfolio could help capture a greater share of their wallet.
Benefits of Forecasting Your Customer’s Future Value
Customer segmentation and targeted messaging of this kind is just one of the many benefits of forecasting Future Value as part of your Customer Lifetime Value efforts. Product development, customer service, improved financial forecasting, and much more are available to those who understand the value of their customers on an individual level. Just the process of assembling the pieces to make CLV calculations possible opens new ways of thinking about the consumers you serve…and that may be the best benefit of all.
If your business is interested in beginning a journey towards a more complete view of your customer, including calculating CLV, contact us and let’s talk about it today! Email | Call: 804.747.0000
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.