In short, the Customer Lifetime Value represents the value that a customer brings to a company during their entire “customer life”. This key figure allows conclusions to be drawn for the sensible calculation of marketing expenses.
What does the concept of customer lifetime value include in detail?
Companies want to make a profit. This means: The income that a company generates from its products and services must, at least over a longer period of time, exceed the expenditure for the manufacture and sale of these products. While this can still be determined very well for goods, for example, it looks a little different for marketing measures. What does the company earn from advertising? Does the income exceed the cost of design and production?
Areas of application and goals of customer lifetime value
CLV and marketing mix
The marketing mix consists of the four pillars of product policy, price policy, communication policy and distribution policy. These four fields of action interlock and ensure that the individual communication and sales measures for a product or service are coordinated with one another. It should be noted that a customer will respond differently to different marketing measures in the course of their relationship with a company.
Customer Lifetime Value and CRM
Let us now come to the meaning of Customer Lifetime Value. The customer does not notice the calculation of the customer lifetime value, it is also irrelevant for him. However, the company can benefit from this because it can use this as a basis to align its marketing strategies and optimize existing measures.
The CLV is therefore important for customer relationship management (CRM) or resource management . When companies calculate customer lifetime value, they always aim to adapt marketing to their customer base or potential new customers.
As an entrepreneur, you assume that with a high customer lifetime value, you should invest more money and personnel in caring for this customer. However, this would not be profitable for a customer with a low customer lifetime value. Therefore, you can throttle your efforts here.
But what options are available to you after you have determined this value?
First and foremost, you will optimize or change your advertising measures in order to adapt them to the needs of the customers. This also allows you to win new customers and thus increase your profit . In addition, you can better control your customer management and strengthen customer loyalty to your company.
After this determination, your responsible staff can strengthen the contact with the promising customers and look after the other customers to the normal extent. This also saves resources and time.
The 6 phases of the customer life cycle
There are different models with which different phases of the life cycle are represented. These vary from 3 to 6 steps or phases.
For example, the most extensive classification is that in 6 phases:
- Penetration phase
- Maturity phase
- Crisis phase
- Separation phase
Sometimes a distinction is only made between the initiation phase and the active and passive customer phase . But no matter which and how many phases we use, the process is always the same:
The customer has to be interested in your product and you have to advise them, interact with them and make an effort to win them over as a customer. For this initiation you already need various marketing methods and you can try to simplify the purchase decision with brochures or a newsletter.
After all, you have won them over as a customer and can then try to make other products from your portfolio attractive to them. This happens particularly often, as a prime example, so to speak, when signing a mobile phone contract. Here, in the course of the contact, you will be advised to move your landline to the provider as well. As an existing customer, you will then be courted and penetrated and you will continuously receive further offers.
If the customer is exhausted and has bought all offers or has decided not to buy your other products, it can be that he becomes a member of the card. Or the first problems with the products arise and the customer becomes dissatisfied and complains. This is how you get into the crisis phase, in which you have to actively seek the customer. If you fail to do this, you will be stuck in the separation phase . The customer will cancel their contracts (for example your mobile phone contract) or will no longer buy any products.
Recovery measures can still take place after or during the separation phase . This could be the case if you offer free products for a contract extension or special conditions. As you can see, it is important for all these phases to have suitable marketing measures and the necessary resources (staff and budget).
Because: If the customer lifetime value is known in the course of the customer life cycle, not only can the measures of the marketing mix be assigned, but also targeted cost calculations for the individual instruments.
Customer care and customer acquisition
The CLV has become an established tool in many companies, especially for gaining customers and maintaining their loyalty to the company. In a survey by the “Forrester Research” institute, three quarters of the companies surveyed stated that they use customer lifetime value for customer care and customer acquisition . This increases customer loyalty significantly and improves existing customer relationships. According to the company, however, it is important to take a holistic approach that also includes the use of social media data.
Importance for online marketing
In this context, we explain the importance of the CLV for e-mail marketing: When determining customer value, data from the past is collected and, based on this, forecast values for future purchasing behavior are determined. If it is possible to determine this data for individual customers or customer groups on the basis of an analysis of the purchasing behavior of individual customers or customer groups, the customer group with the highest customer lifetime value can easily be calculated from this. If you take this customer group into the focus of customer loyalty measures, for example through email marketing , you usually use your marketing budget more effectively than by constantly addressing new customers and losing existing customers at the same time.
Advantages and disadvantages of the customer lifetime value
Like almost everything, the calculation of the customer lifetime value naturally has its advantages and disadvantages.
Benefits of customer lifetime value
Great advantages result from the fact that a company can use these figures to calculate past and future profit per customer. This is extremely helpful for the financial planning and presentation of a company .
As already mentioned above, the focus is on planning your corresponding marketing measures, which can be tailored to the customers. This vote gives you another financial advantage. Because you can target the campaigns specifically to the customer and plan a large or small budget depending on the customer value .
Thus, for good reasons, the CLV is one of the most important key figures from business administration, which helps you to always check and adjust your investments in the area of customer relationship management (CRM). Especially because the customer can be assigned a specific marketing measure in every phase of the customer life cycle.
Disadvantages of customer lifetime value
Despite the existing customer lifetime value formula for correct calculation, there are also disadvantages to the whole thing. Because in principle you only calculate with estimated values here . Although the calculation is based on the sales made so far, it is not said that the last sales also correspond to the future forecast sales. You could also suffer a slump in sales, making the numbers much smaller. In the worst case, you will not have any sales for the forecast period.
You can counteract this by tracking your sales as far back as possible and including them in the current calculation. The longer the considered period in the past, the more accurate the future calculation will be. But that also depends entirely on how you came up with this data and what the basis for it was. If you work with tracking measures, it is difficult for data protection reasons and the anonymization of the data to assign the purchases and sales to a specific customer and to extrapolate them in a targeted manner.