Customer Lifetime Value
The Customer Lifetime Value (CLV) is a key figure from business administration . It generally describes the contribution margin that a customer realizes during his entire "customer life", discounted to the point in time.
The CLV can thus be understood as the average value that a customer has for a company over the years or will have in the future. For its calculation, therefore, not only historical revenues but also expected future revenues are taken into account (customer potential).
When determining the CLV, the possible customer value must be distinguished from the actual customer value. In the possible customer value, the total expenditure of a customer, including those of competitors, is taken into account in a certain area, while the actual CLV only takes into account the expenditure that the customer makes at his own company.
Companies use the CLV to be able to tailor marketing measures to customers more efficiently. For example, a high CLV justifies higher budgets for servicing a particular customer.
According to Robert C. Blattberg and John Deighton, the decisive questions for evaluating new products or services, new programs and new customer service activities are not:
- "Will it attract new customers?" - "Will new customers be won?"
- "Will it increase our retention rates?" - "Will existing customers be retained?"
In their opinion, the crucial question should be:
- "Will it increase our customer equity?" - "Will the customer value be increased for us?"
Because customer value is the prerequisite for shareholder value . Marketing activities are carried out on the basis of the importance of the customer to the company, in order to retain particularly profitable customers for longer. To do this, it is necessary to know the current and future earnings or earnings potential of each customer.
Customer ratings (e.g. ABC analysis ) and goals based on sales have been set for a long time , but this does not go far enough, as it is not the sales with a customer that is of decisive importance for a company, but the profit that is made can be generated from this customer relationship. In the “mom and pop shop” the salesperson knew every customer and was able to assess their customer value . This is no longer possible in today's world with sometimes many thousands of anonymous customer relationships.
In the following it is described which methods are available for determining customer value and a classification of these methods is carried out. The attractiveness and potential of a customer are an important part of customer ratings. The methods for quantifying qualitative properties, the explanation of known models (e.g. Kano model ) and the detailed description of some methods for determining customer value are not discussed.
Greatly simplified calculation: example car
Here, the customer lifetime value of customers with an average age of 45 years is estimated: The manufacturer expects that customers will buy a new car every four years on average with a contribution margin of around € 15,000 as well as additional services with a contribution margin of around € 500 / Year to complete. The business relationship is estimated at 20 years. An average car driver has a customer value of € 85,000 (without discounting to the present day).
However, there is also the option of expanding the customer lifetime value model and, in addition to quantitative parameters such as acquisition costs, assignable direct costs and sales, also including qualitative parameters such as the recommendation potential and cross-selling potential.
Extended model: four partial values of the customer lifetime value
- Basic business (sum of expected payments and payments) - weighting e.g. B. 50%
- Expansion potential (sum of expected payments and payments) - weighting e.g. B. 25%
- Reference potential (sum of expected payments and payments) - weighting e.g. B. 15%
- Learning potential (sum of expected payments and payments) - weighting e.g. B. 10%
First of all, the individual areas must be weighted: the base business could e.g. B. be weighted with 50 percent because it is very important from the management's point of view. 25 percent could then be placed on the expansion potential, etc.
Then the expected profits in monetary units are discounted to today (capital value) and assigned to the respective customers in the respective area. Usually this is done using approximate prize categories and categorization into very attractive to very unattractive. Assigning the number 10 (very attractive) to customer A in the base business would mean that customer A is forecasting a profit of around 100,000 euros per year in the base business, which we rate as very attractive. When customer B can then z. For example, the expansion potential of 5 (+50,000 per year) can be assumed, since information has been obtained that this company is growing, or, for consumers, that the incomes of a certain occupational group will increase, etc. The formation of indicators for such forecasts and the correct ones from them Deriving evaluations of the potential is the real challenge in this calculation.
Customer Lifetime Value and Marketing Mix
The CLV makes it possible to allocate costs and income to individual phases and thereby use the instruments of the marketing mix (product, communication, price, distribution) accordingly. The individual phases of the customer life cycle are:
- Initiation (persuasion, stimulation)
- Socialization (acclimatization)
- Penetration phase ( cross selling , individualization)
- Maturity phase (change barriers, increase efficiency)
- Crisis phase (correcting mistakes, making amends)
- Separation phase (convincing, stimulating, waiting for abstinence phase)
Evaluation of the CLV
The theoretically possible assignment of the customer to one of the six different phases makes it easy to tailor the marketing measures to the customer and his current needs.
Criticism of the CLV concept
The customer lifetime value method harbors the fundamental problem of forecast uncertainty. On the one hand, it is difficult to estimate the likely duration of a customer relationship; on the other hand, it is even more difficult to base the invoice on adequately customer-related incoming and outgoing flows.
In practice, therefore, empirical values are often used; younger companies that don't already have them often use benchmarks. Despite its theoretically good suitability, the CLV model is therefore difficult to apply in practice if there is no transaction-related data (purchase history).
CLV is widespread in the United States. Various companies keep a very precise record of who bought what where, when. In addition, there are service providers such as Zeta Global who make the profiles of millions of individuals available. The personal CLV score can have a significant impact on how customers are treated.
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- Customer Lifetime Value - Glossary
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