Customer Lifetime Value (CLV) calculations depend in part on predictions based on past actions or industry averages.
This means you can’t bet the farm on the outcome of your CLV formulas. The best way to use CLV is to think of it as an indicator, to be interpreted along with other customer data—and with a good dose of common sense.
If the CLV result seems “off” make sure that your chosen factors are being used/weighted correctly. CLV calculation details are hotly debated with some experts advising the use of complex formulas that look like rocket science. Others advocate using only basic data like: length of customer relationship, recency of last purchase, number of purchases per year and annual dollar amount of purchases. Either opinion is useful and valid, as long as you understand how to use the data that comes out of this calculation.
Use your Customer Lifetime Value wisely
Customer lifetime value is best used as a comparison tool between past, present or future customer value to show a trend and/or as a general guideline combined with other factors, like your industry experience, it can be a big help to your business operation. If you simply write off customers based solely on a CLV number, it can be bad for your bottom line.
How business owners, CEOs and management use Customer Lifetime Value to guide business processes toward growth:
- Guiding customer service, promotions and win-back strategies - By indexing/assigning a number/score to each client, customer service staff could be instructed to use it as a guideline when offering upgrades to prevent customer churn or loss.
- Targeting market communications - Send a certain message/email/brochure to a particular CLV level/customer type and a different one to other segments.
- Risk management/warning system - CLV projections can be used to reveal increasing churn rates in a certain customer segment, so that a plan can be made to counter the problem.
- Evaluating business strategies - Assess the effect of customer retention programs or calculate the profitability potential of a price increase, taking into account defections.
- Sales force allocation - Determine the sales potential of an area/territory to estimate how many salespeople are needed, to help figure bonuses, etc.
- Reporting - Use CLV to help save a program that has potential, but needs more time to effect other indicators, like sales of a particular brand or bottom line profit.
Kept in proper perspective and used wisely, CLV is an excellent tool for business growth.