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Calculating customer lifetime value is 1 of 6 customer experience management success factors. It motivates executives and prioritizes employee engagement in differentiating customer experience. See http://ClearActionCX.com
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www.ClearActionCX.com
Customer Lifetime ValueMotivate Executive & Employee Engagement
in Prioritized Customer Experience Improvement & Innovation
©2011 ClearAction LLC. All rights reserved.
Customer Portfolio
“Profitability: The Fifth ‘P’ of Marketing”, Bank Marketing -- Thomas N. Petro
Every company loses money on some of its customers
Largest customers demand considerable service and deepest discounts
Smallest customers pay full price and receive minimal service but the costs of transacting
with small customers reduce their profitability
Midsize customers receive good service and pay nearly full price
(often most profitable)
Customer A Customer B Customer C
Product A + + + Highly Profitable Product
Product B + Profitable Product
Product C - - Losing Product
Product D + - Mixed-Bag Product
High-Profit Customer
Mixed-Bag Customer
Losing Customer
©2011 ClearAction LLC. All rights reserved. Zero Defections: Quality Comes to Services – Reichheldd & Sasser, HBR 1990
Customer Lifetime Value
k = customer
n = years
a = referrals
b = upsells
c = cross-sells
d = price elasticity
e = share of wallet
f = reduced operating cost
Customer Lifetime Value
Calculate Cumulative Profit Stream Over Duration
of a Customer’s Interest in a Brand Category
𝐂𝐋𝐕 =
𝑘=0
𝑛
Revenue − Costs (a+b+c+d+e+f)
©2011 ClearAction LLC. All rights reserved.
• $5,000 Annual revenue per customer
• 10% Company profit margin
• 2 Average # of loyal years
• $1,000 Customer Lifetime Value ($5,000 x 10% x 2)
As long as the cost is less than the CLV, the company should invest
$300 Cost of average sales call (salary, commission, benefits, expenses)
4 Average # of sales calls to convert prospect into a customer
$1,200 Cost of attracting a new customer ($300 x 4)
PLUS cost of advertising and promotion ÷ # new customers (+ overhead)
Company is spending more to attract new customers than their lifetime value
bankruptcy!
A Practical Use of CLV
©2011 ClearAction LLC. All rights reserved.
©2011 ClearAction LLC. All rights reserved.
CLV Myths
• Long-term customers purchase more
• Long-term customers are more desirable than short-term customers
• Share of wallet increases as customer lifetime increases
• Customer share-of-wallet is driven by increasing customer loyalty
• Loyal customer are less sensitive
• Loyal customers cost less to service than non-loyal customers
• Loyal customers are always profitable customers
• Customer satisfaction brings customer loyalty
• Customer revenue is a good predictor of profitability
Loyalty Myths – Keiningham, Vavra, Aksoy, Wallard
©2011 ClearAction LLC. All rights reserved.
Alternative CLV Formulas
𝐂𝐋𝐕 =
𝑘=0
𝑛
Transactions x NPV of Margins
Expected number of transactions from a customer each year x
Number of years the customer is expected to remain loyal x
Discounted net present value of margins on those purchases each year
Return on Customer – Peppers & Rogers
i = the rate of return that could be earned on an investment in the financial markets
with similar risk
N = the total number of periods
Rt = cash flow minus cash outflow at time t
t = the time of the cash flow
©2011 ClearAction LLC. All rights reserved.
Alternative CLV Formulas
Expected purchase frequency x
Loyalty probability x
Return on Customer – Peppers & Rogers
(Expected model of repurchase x Margin on expected model) +
(Expected options purchased x Margin on options) +
(Probability of using manufacturer financing x
Likely face value of financing contract x Finance contract profit margin) +
(After-sales probability x Expected after-sales revenue x
After-sales profit margin)
x Adjustment for net-present-value discounting
©2011 ClearAction LLC. All rights reserved.
Top 5 Obstacles to CEM Success
2012 ClearAction Business-to-Business Customer Experience Management Best Practices Study
In my company, the top 5 obstacles to achieving our CEM goals are:
©2011 ClearAction LLC. All rights reserved.
Maturity of CEM Practices
2012 ClearAction Business-to-Business Customer Experience Management Best Practices Study
13%
15%
26%
33%
36%
23%
23%
34%
43%
48%
4%
13%
13%
13%
19%
Calculate
Predict
Segment
Connect
Establish
Integrate
Analyze
2012 2011 2010
8%
12%
13%
13%
19%
52%
20%
42%
40%
38%
42%
38%
40%
65%
46%
48%
50%
46%
42%
10%
Calculate customer lifetime value
Use predictive analytics to anticipate customer reactions towhat-if scenarios
Segment customers based on lifetime value or customerexperience parameters
Connect data across customers' end-to-end experience withthe company
Establish a single view of each customer across divisions ®ions
Integrate customer feedback sources
Analyze integrated customer data
Perhaps World Class Well-Established Just Starting On Our Wish List Not Planned/Unknown
Success Factors for World-Class Performance
1) Coordination among managers of CEM methods
2) CEM as a determinant of corporate strategy
3) Presentation of survey results to all employees
4) Calculation of customer lifetime value (CLV)
5) Action on survey results by owners of CX key drivers
6) Funding of cross-organizational collaboration
©2011 ClearAction LLC. All rights reserved. 2011 ClearAction Business-to-Business Customer Experience Management Benchmarking Study
Calculating Customer Lifetime Value coincided
with strong business results and at least 20 percentage points advantage in the use of these
CEM best practices.
When respondents answered “Perhaps World Class” or “Well-Established” to the question “How well established is
your practice of calculating customer lifetime value?” … their performance financially and in the following CX best
practices were far superior:
CLV is a CEM Success Factor
©2011 ClearAction LLC. All rights reserved.
Sources of Revenue
𝐂𝐋𝐕 =
𝑘=0
𝑛
Revenue − Costs
Repeat purchases
Price elasticity
Share of wallet
Upselling
Cross-selling
Word-of-mouth
Price x x Duration
Converting Customer Value – Murphy, Burton, Gleaves, Kitshoff
©2011 ClearAction LLC. All rights reserved.
Allocating Costs
Gross profit contribution
Partial overhead allocation
Customer-related cost allocation
Full allocation of customer costs
• Averages:
• Accounts:
Customer profitability analysis:
allocation of costs & revenues to specific customers
Converting Customer Value – Murphy, Burton, Gleaves, Kitshoff
©2011 ClearAction LLC. All rights reserved.
Sources of Costs
Selling Costs
Servicing Costs
Relationship Costs
Business-Sustaining Costs
• Advertising• Sales force• Promotions
• Order processing• Shipping• Installation• etc.
• Account mgt.• Administration• Hospitality• CRM• etc.
• Offices, premises• Execs, staff• Insurance• R&D• etc.
Apply to year 1
Costs = Cost of Goods Sold + Selling Costs + Servicing Costs
+ Relationship Costs + Business-Sustaining Costs
• Salaries, commissions, pension, insurance
• Car, travel expenses
• Occupancy, home office allowance
• Laptop, phone, communications
• Taxes
𝐂𝐋𝐕 =
𝑘=0
𝑛
Revenue − Costs
Converting Customer Value – Murphy, Burton, Gleaves, Kitshoff
©2011 ClearAction LLC. All rights reserved.
Sources of Costs
Selling Costs
Servicing Costs
Relationship Costs
Business-Sustaining Costs
• Advertising• Sales force• Promotions
• Order processing• Shipping• Installation• etc.
• Account mgt.• Administration• Hospitality• CRM• etc.
• Offices, premises• Execs, staff• Insurance• R&D• etc.
• Inquiries: technical, price, invoice, balances, payments
• Changes: price, account details, returns
• Requests: documentation, delivery status, issues
• Packing, delivery, notifications, stocking, expediting
• Debt mgt
𝐂𝐋𝐕 =
𝑘=0
𝑛
Revenue − Costs
Converting Customer Value – Murphy, Burton, Gleaves, Kitshoff
©2011 ClearAction LLC. All rights reserved.
Sources of Costs
Selling Costs
Servicing Costs
Relationship Costs
Business-Sustaining Costs
• Advertising• Sales force• Promotions
• Order processing• Shipping• Installation• etc.
• Account mgt.• Administration• Hospitality• CRM• etc.
• Offices, premises• Execs, staff• Insurance• R&D• etc.
• Mgt review of accounts, regular calls
• Negotiations, price notification
• Promotions, industry forums
• Newsletters, user groups
• Inside sales, field sales
𝐂𝐋𝐕 =
𝑘=0
𝑛
Revenue − Costs
Converting Customer Value – Murphy, Burton, Gleaves, Kitshoff
©2011 ClearAction LLC. All rights reserved.
CLV Recommendations
1) Use simple flow of customer interaction
a) Net revenue by customer
b) Direct cost of product or service by customer
c) Total business unit costs; ID cost drivers of each flow point
• Costs directly traceable to specific customer transactions
• Use estimates to provide a starting point
• Tackle ambiguous costs later
• Apply costs at lowest possible activity level (e.g. transaction)
2) Sort customers; draw a cumulative profitability curve
3) ID reasons for unprofitable customers; increase value to co.
Converting Customer Value – Murphy, Burton, Gleaves, Kitshoff
CLV is a process, not an exact science
There will never be 1 correct number for a customer’s profitability
©2011 ClearAction LLC. All rights reserved.
CLV Visualization & Strategies
Profit ($)
Customers
Most
profitable
Least
profitableCustomers
Profit ($)
Bottom-line profitability
Cumulative profitability curve for
all customers
1) Reduce cost to acquire new customers
2) Cross-sell and up-sell effectively
3) Increase customer lifetime
4) Reduce relationship costs
5) Reduce servicing costs
Converting Customer Value – Murphy, Burton, Gleaves, Kitshoff
1) Who are the customers the company needs to retain?
2) What retention activities are in place for them?
3) What do they have in common?
4) How did we acquire them?
5) How can we acquire more of them?
6) Do frontline staff know who the profitable customers are?
7) Are marketing & sales activities focused on acquiring more of them?
8) Is advertising focused on acquiring more of them?
9) Are marketing & advertising focused on the most successful channels?
Ask About Profitable Customers
Converting Customer Value – Murphy, Burton, Gleaves, Kitshoff ©2011 ClearAction LLC. All rights reserved.
1) Why are they unprofitable?
2) What do they have in common?
3) How did we acquire them?
4) Do frontline staff know they are unprofitable ?
5) What systems & procedures are in place to prevent the acquisition of more
unprofitable customers?
6) What can we do to make them profitable?
Ask About Unprofitable Customers
Converting Customer Value – Murphy, Burton, Gleaves, Kitshoff
Strategic Value Growth Potential Reduce Costs to Serve
Referrals
Premiums
Innovative ideas
Enabler©2011 ClearAction LLC. All rights reserved.
Industry
Life cycle
Negotiations
Menu pricing
Marketing
Sales
Service
No frills
Using CLV to Guide the Company
Converting Customer Value – Murphy, Burton, Gleaves, Kitshoff
Voice-of-customer weighting
©2011 ClearAction LLC. All rights reserved.
Prioritize complaint handling
Improve lead nurturing
Right-sell
Cross-sell
Right-size service levels
Monitor customer behaviors
Benchmark unprofitable
vs. profitable customers
• Marketing & sales time
• Special service or info requirements
• Technical assistance
• Referral fees
• Number of invoices
• Legal fees
• Discounts
• Rebates
Attitude adjustment- Front-line
- Back-office
Input to strategic decisions
Adjust policies
©2011 ClearAction LLC. All rights reserved.
More CLV Resources
http://ClearActionCX.com/cx-books/
Do you like these concepts?
Let us help you master them
to increase your company’s growth!
Contact us today:
tel +1 408 687 9700
ClearAction clients praise our insights on actionability & engagement
“ClearAction taught us things
that wouldn’t readily cross our
minds and has increased our
efficiency & accuracy in many
areas. We highly recommend
ClearAction as a business
consultant.”
“The cross-functional collaboration
necessary to successfully manage
the customer experience requires
big picture, systems thinking.
ClearAction brings very practical,
well-thought out approaches to get
the internal cooperation needed.”
“ClearAction is very dependable
and detail-oriented, and has an
extremely high sense of integrity.
There's no question ClearAction
will do what's needed to ensure
the work is done correctly and the
client's best needs are taken into
account.”
Consulting Roles
We have provided ClearWisdom™ to dozens of companies
Partial List
Customer Experience Optimization Talk Show
Hear interviews with companies such as:Adobe, Aon, CenturyLink, Cisco, Citrix,
Coca Cola Enterprises, Dell, EMC, GE, HP, ICW, Intuit, Kimpton, NCR, Philips, Safelite,
Sungard, SunTrust, Symantec, TELUS, tw telecom, Virgin Mobile, Wells Fargo
http://ClearActionCX.com/cx-podcasts
e-books available at ClearActionCX.com/cx-books
or Amazon Kindle:Metrics You Can Manage For Success
Customer Experience Improvement MomentumInnovating Superior Customer Experience
white paper available at ClearActionCX.com/cx-articles
Employee Engagement in Superior Customer Experience: 4 Overlooked Key
Competencies for Sustainable Results
Resources about customer experience optimization
See more at
http://ClearActionCX.com/best-practices
For More About Customer Experience:
www.ClearActionCX.com/best-practices
tel +1 408 687 9700