Keeping Tally: Understanding the Significance of Mapping Customers' Lifetime Value

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Customer Experience
Customer Experience
Identifying the most valuable customers will help organizations invest their resources more appropriately. Savvy business leaders are calculating customers' lifetime value, allowing brands to focus on their most worthy clients.

Acquiring new customers is not an easy task. Further, business leaders have long recognized that new customer acquisition is a costly and lengthy process and are therefore working on retaining these clients and maximizing their value.

The most forward-looking organizations are making sure that their efforts to acquire new customers have long-term results. These companies are putting a lot of focus on creating the best experience possible that will make customers want to return. In a bid to have a long-term view of their clients, the savviest companies are trying to calculate their customers' lifetime value.

In their book Return on Customer, Peppers & Rogers Group founding partners Don Peppers and Martha Rogers, Ph.D, describe a customer's lifetime value as "the net present value of the future stream of cash flows a company expects to generate from the customer." The authors explain that customers create value for a company by increasing both current and future cash flows. Therefore, if based on a good experience a customer decides to do more business with that company, the organization has gained instant value. "It doesn't matter that the extra business a customer might give a company won't happen for a few months or a few years-the customers' intent has changed already, and so the customers' lifetime value (LTV) went up immediately, in the same way a share price would go up immediately if the company were suddenly expecting better profits sometime in the future," Peppers and Rogers argue.

Speaking to 1to1 Media, Peppers notes that understanding lifetime value can guide a company's actions. "If they know there's an asset at stake, they're going to be more careful with that customer," he explains. "Every customer is different, and communications that treat all customers similarly could result in missed opportunities," notes Debbie Braunert, vice president of marketing at Soundbite Communications. Joe McFadden, Salesportal's vice president of marketing, explains that understanding a customer's lifetime value will help companies deliver the right experience and even the most relevant messaging. Peppers goes a step further, stressing that organizations need to understand the needs that customers will have throughout their lifetime and then create and market products and services that will address these needs to increase the potential value of that customer.

A great experience can impact lifetime value

In this article, Forbes contributor Tom Gillis explains how a great experience at Nordstrom has turned him into a loyal customer. Gillis returned a pair of khakis to Nordstrom thinking they had shrunk, although he later admits it was his waistline that changed. Rather than point this out, the Nordstrom clerk apologized and gave him a new pair of pants, turning a sour experience into a great one.

Nordstrom's reaction is admirable and showcases a company that doesn't focus on the value of individual transactions, but rather recognizes the lifetime value of individual customers and how it could be impacted by different actions. Positive actions by organizations can increase the current customer value and lead to a higher potential lifetime value. Thus, Gillis' lifetime value before returning the pants to Nordstrom was based on how many purchases he was likely to make, but the way Nordstrom handled his problem drastically increased his willingness to do business with that company.

As Avinash Kaushik, co-founder and chief education officer for Market Motive, notes in this blog, the best marketers and analysts go beyond click-through rates, measuring visits, and conversion rates, but use lifetime value computations to really understand which customers are creating the best long-term value for a company. "That is focusing on real success, not simply the first conversion," Kaushik notes.

Instead, organizations need to understand that the value of a loyal customer can be substantial, especially when you take into consideration repeat purchases over the customer's lifetime as well as referrals.

Considering these evident benefits, why aren't more organizations focusing on calculating customers' potential lifetime value and then acting according to the results? "Theoretically, everyone understands that this is something that needs to be done," says Diane Berry, senior vice president of marketing and communications at Coveo. Apart from the potential complication of accurately compiling lifetime value, Berry explains that there's also a problem with business leaders being too focused on today.

Peppers agrees, noting that while most business leaders understand the importance of understanding a client's lifetime value, many aren't prioritizing this effort because they are more concerned with short-term results.

Further, there are several variables that can influence a customer's lifetime value, for example changes in his life like getting married and having children. Peppers notes that it is very difficult to know the exact lifetime value of customers since future events-both personal and not-can have an impact on that customer's value. Berry recommends looking at the buying journeys of similar customers to help determine lifetime value. While calculating lifetime value can be complicated, even having a vague idea is critical and should be used to inform future business decisions.

One challenge in calculating a customer's lifetime value is not having the necessary data in the right place, Coveo's Berry says. This becomes even more complicated in today's omni-channel world, where customers are doing business with brands over multiple channels. Overcoming this challenge requires bringing data from different departments together to have a 360-degree view of each customer and their interactions with the organization.

Recognizing customers' changing circumstances

Organizations also need to keep in mind that a customer's financial state can change over the years. Dan Smith, Outsell's vice president of products, uses the example of a college graduate who buys an economy vehicle as his first car but moves to a more luxurious vehicle when his spending power increases. "We're looking at how people evolve over a lifetime," Smith says, adding that organizations should look at the income potential of individual customers. Such insight can be gleaned not only over social media, but also during conversations with customers, for example asking the new graduate which college he went to and his current job.

This reality means that customers who aren't spending a lot of money with a particular company, or only making a purchase occasionally, could very well become loyal, high-value customers in the future. Therefore, even if extra focus is put on high-value customers, business leaders need to make sure that their organizations are delivering optimal experiences across the board.

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