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Customer Lifetime Value

By HWA | Publish On: May 10, 2010 | Posted In:

Customer Lifetime Value Management

In today’s dynamic business world of changing face of customers is a challenge to reckon with. Companies are increasingly faced with the Herculean task of keeping track of their customers, maintaining consistency within the organization and satisfying needs so as to enjoy continued patronage. It’s requirement to build and maintain successful individual-level customer relationships in order to maximize profitability and ensure customer loyalty for future profitability. Relationships with customers are not always secure. It is difficult to predict for how long the customer is going to stay with a firm in a non-contractual setting. Firms have to adopt innovative customer relationship management strategies to manage customers and ensure higher profitability.

Customer Lifetime Value

Customer management strategies are aimed at addressing the needs of every customer and by developing a one-on-one relationship with them. CRM-based strategies can be adapted and implemented in a wide range of companies and sectors, and both in B2B and B2C settings.

Companies’ outlook can be broadly categorized into two types namely, Product-centric and Customer-centric. Product-centric firms concentrate more on their product line and therefore on increasing the product line for customers. Where as, Customer-centric approach concentrates more on the needs of the customers in the first place. Many new companies have challenged the product-centric approach and succeeded in doing so. Therefore in customer-centric approach the customer value becomes important. But, what is the value of customers. Can customers be evaluated? If so, how? What are the metrics and gauges used in this approach? Now, customer value has to be understood in the first place.

Customer value is the contribution of a customer to the company or the duration of their relationship with the firm. Put it simply the customer value it that value which a customer brings over a lifetime from the current period and it therefore reflects the future profitability from that particular customer.

In other words, Customer Lifetime Value helps the firm treat each customer differently rather than treating all the customers alike.

Calculating the CLV helps the firm to know how much it can invest in retaining the customer so as to achieve a positive Return On Investment.

Once the CLV is calculated the firm can allocate its limited resources to achieve maximum return. The CLV framework can also help to sell the best products to those better customers.

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