Customer Value: Do the Math
Customer lifetime value. It's a metric that many of the executives I speak with long to calculate and use, but say they lack the data necessary to truly assess. One of the challenges is in how an organization defines customer value. Some base it on purchases alone. Other may include such "soft" data as customer influence (with other customers and in the broader market) in the calculations. There are myriad views of what comprises customer lifetime value (CLTV).
One issue that often comes up in the CLTV conversation is the challenge of tracking changes to that value based on events that happen today. For example, a great service experience may increase a customer's value today in a way that won't be apparent until later in the relationship (e.g., unplanned additional purchases or referrals). Conversely, a barrage of unwanted marketing in a given timeframe may destroy CLTV by decreasing a customer's likelihood to make future purchases.
This month's issue of Return on Customer reveals how reinsurance firm Hannover Re calculates its customers' value to the firm. Hannover Re has created a mathematic equation to value customers that factors in such elements as deal size, repurchase behavior, and whether the customer has a strategic relationship with the company.
What do you think? Does your organization assess CLTV? Can any company truly know its customers' lifetime value? How important is it to know CLTV?
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