Customer Lifetime Value to Prioritize Customer Experience Management

www.ClearActionCX.com

Customer Lifetime ValueMotivate Executive & Employee Engagement

in Prioritized Customer Experience Improvement & Innovation

©2011 ClearAction LLC. All rights reserved.

Customer Portfolio

“Profitability: The Fifth ‘P’ of Marketing”, Bank Marketing -- Thomas N. Petro

Every company loses money on some of its customers

Largest customers demand considerable service and deepest discounts

Smallest customers pay full price and receive minimal service but the costs of transacting

with small customers reduce their profitability

Midsize customers receive good service and pay nearly full price

(often most profitable)

Customer A Customer B Customer C

Product A + + + Highly Profitable Product

Product B + Profitable Product

Product C - - Losing Product

Product D + - Mixed-Bag Product

High-Profit Customer

Mixed-Bag Customer

Losing Customer

©2011 ClearAction LLC. All rights reserved. Zero Defections: Quality Comes to Services – Reichheldd & Sasser, HBR 1990

Customer Lifetime Value

k = customer

n = years

a = referrals

b = upsells

c = cross-sells

d = price elasticity

e = share of wallet

f = reduced operating cost

Customer Lifetime Value

Calculate Cumulative Profit Stream Over Duration

of a Customer’s Interest in a Brand Category

𝐂𝐋𝐕 =

𝑘=0

𝑛

Revenue − Costs (a+b+c+d+e+f)


• $5,000 Annual revenue per customer

• 10% Company profit margin

• 2 Average # of loyal years

• $1,000 Customer Lifetime Value ($5,000 x 10% x 2)

As long as the cost is less than the CLV, the company should invest

$300 Cost of average sales call (salary, commission, benefits, expenses)

4 Average # of sales calls to convert prospect into a customer

$1,200 Cost of attracting a new customer ($300 x 4)

PLUS cost of advertising and promotion ÷ # new customers (+ overhead)

Company is spending more to attract new customers than their lifetime value

bankruptcy!

A Practical Use of CLV



CLV Myths

• Long-term customers purchase more

• Long-term customers are more desirable than short-term customers

• Share of wallet increases as customer lifetime increases

• Customer share-of-wallet is driven by increasing customer loyalty

• Loyal customer are less sensitive

• Loyal customers cost less to service than non-loyal customers

• Loyal customers are always profitable customers

• Customer satisfaction brings customer loyalty

• Customer revenue is a good predictor of profitability

Loyalty Myths – Keiningham, Vavra, Aksoy, Wallard


Alternative CLV Formulas

𝐂𝐋𝐕 =

𝑘=0

𝑛

Transactions x NPV of Margins

Expected number of transactions from a customer each year x

Number of years the customer is expected to remain loyal x

Discounted net present value of margins on those purchases each year

Return on Customer – Peppers & Rogers

i = the rate of return that could be earned on an investment in the financial markets

with similar risk

N = the total number of periods

Rt = cash flow minus cash outflow at time t

t = the time of the cash flow


Alternative CLV Formulas

Expected purchase frequency x

Loyalty probability x

Return on Customer – Peppers & Rogers

(Expected model of repurchase x Margin on expected model) +

(Expected options purchased x Margin on options) +

(Probability of using manufacturer financing x

Likely face value of financing contract x Finance contract profit margin) +

(After-sales probability x Expected after-sales revenue x

After-sales profit margin)

x Adjustment for net-present-value discounting


Top 5 Obstacles to CEM Success

2012 ClearAction Business-to-Business Customer Experience Management Best Practices Study

In my company, the top 5 obstacles to achieving our CEM goals are:


Maturity of CEM Practices

2012 ClearAction Business-to-Business Customer Experience Management Best Practices Study

13%

15%

26%

33%

36%

23%

23%

34%

43%

48%

4%

13%

13%

13%

19%

Calculate

Predict

Segment

Connect

Establish

Integrate

Analyze

2012 2011 2010

8%

12%

13%

13%

19%

52%

20%

42%

40%

38%

42%

38%

40%

65%

46%

48%

50%

46%

42%

10%

Calculate customer lifetime value

Use predictive analytics to anticipate customer reactions towhat-if scenarios

Segment customers based on lifetime value or customerexperience parameters

Connect data across customers' end-to-end experience withthe company

Establish a single view of each customer across divisions &regions

Integrate customer feedback sources

Analyze integrated customer data

Perhaps World Class Well-Established Just Starting On Our Wish List Not Planned/Unknown

Success Factors for World-Class Performance

1) Coordination among managers of CEM methods

2) CEM as a determinant of corporate strategy

3) Presentation of survey results to all employees

4) Calculation of customer lifetime value (CLV)

5) Action on survey results by owners of CX key drivers

6) Funding of cross-organizational collaboration

©2011 ClearAction LLC. All rights reserved. 2011 ClearAction Business-to-Business Customer Experience Management Benchmarking Study

Calculating Customer Lifetime Value coincided

with strong business results and at least 20 percentage points advantage in the use of these

CEM best practices.

When respondents answered “Perhaps World Class” or “Well-Established” to the question “How well established is

your practice of calculating customer lifetime value?” … their performance financially and in the following CX best

practices were far superior:

CLV is a CEM Success Factor


Sources of Revenue

𝐂𝐋𝐕 =

𝑘=0

𝑛

Revenue − Costs

Repeat purchases

Price elasticity

Share of wallet

Upselling

Cross-selling

Word-of-mouth

Price x x Duration

Converting Customer Value – Murphy, Burton, Gleaves, Kitshoff


Allocating Costs

Gross profit contribution

Partial overhead allocation

Customer-related cost allocation

Full allocation of customer costs

• Averages:

• Accounts:

Customer profitability analysis:

allocation of costs & revenues to specific customers



Sources of Costs

Selling Costs

Servicing Costs

Relationship Costs

Business-Sustaining Costs

• Advertising• Sales force• Promotions

• Order processing• Shipping• Installation• etc.

• Account mgt.• Administration• Hospitality• CRM• etc.

• Offices, premises• Execs, staff• Insurance• R&D• etc.

Apply to year 1

Costs = Cost of Goods Sold + Selling Costs + Servicing Costs

+ Relationship Costs + Business-Sustaining Costs

• Salaries, commissions, pension, insurance

• Car, travel expenses

• Occupancy, home office allowance

• Laptop, phone, communications

• Taxes

𝐂𝐋𝐕 =

𝑘=0

𝑛

Revenue − Costs



Sources of Costs

Selling Costs

Servicing Costs

Relationship Costs






• Inquiries: technical, price, invoice, balances, payments

• Changes: price, account details, returns

• Requests: documentation, delivery status, issues

• Packing, delivery, notifications, stocking, expediting

• Debt mgt

𝐂𝐋𝐕 =

𝑘=0

𝑛

Revenue − Costs



Sources of Costs

Selling Costs

Servicing Costs

Relationship Costs






• Mgt review of accounts, regular calls

• Negotiations, price notification

• Promotions, industry forums

• Newsletters, user groups

• Inside sales, field sales

𝐂𝐋𝐕 =

𝑘=0

𝑛

Revenue − Costs



CLV Recommendations

1) Use simple flow of customer interaction

a) Net revenue by customer

b) Direct cost of product or service by customer

c) Total business unit costs; ID cost drivers of each flow point

• Costs directly traceable to specific customer transactions

• Use estimates to provide a starting point

• Tackle ambiguous costs later

• Apply costs at lowest possible activity level (e.g. transaction)

2) Sort customers; draw a cumulative profitability curve

3) ID reasons for unprofitable customers; increase value to co.


CLV is a process, not an exact science

There will never be 1 correct number for a customer’s profitability


CLV Visualization & Strategies

Profit ($)

Customers

Most

profitable

Least

profitableCustomers

Profit ($)

Bottom-line profitability

Cumulative profitability curve for

all customers

1) Reduce cost to acquire new customers

2) Cross-sell and up-sell effectively

3) Increase customer lifetime

4) Reduce relationship costs

5) Reduce servicing costs


1) Who are the customers the company needs to retain?

2) What retention activities are in place for them?

3) What do they have in common?

4) How did we acquire them?

5) How can we acquire more of them?

6) Do frontline staff know who the profitable customers are?

7) Are marketing & sales activities focused on acquiring more of them?

8) Is advertising focused on acquiring more of them?

9) Are marketing & advertising focused on the most successful channels?

Ask About Profitable Customers

Converting Customer Value – Murphy, Burton, Gleaves, Kitshoff ©2011 ClearAction LLC. All rights reserved.

1) Why are they unprofitable?

2) What do they have in common?

3) How did we acquire them?

4) Do frontline staff know they are unprofitable ?

5) What systems & procedures are in place to prevent the acquisition of more

unprofitable customers?

6) What can we do to make them profitable?

Ask About Unprofitable Customers


Strategic Value Growth Potential Reduce Costs to Serve

Referrals

Premiums

Innovative ideas

Enabler©2011 ClearAction LLC. All rights reserved.

Industry

Life cycle

Negotiations

Menu pricing

Marketing

Sales

Service

No frills

Using CLV to Guide the Company


Voice-of-customer weighting


Prioritize complaint handling

Improve lead nurturing

Right-sell

Cross-sell

Right-size service levels

Monitor customer behaviors

Benchmark unprofitable

vs. profitable customers

• Marketing & sales time

• Special service or info requirements

• Technical assistance

• Referral fees

• Number of invoices

• Legal fees

• Discounts

• Rebates

Attitude adjustment- Front-line

- Back-office

Input to strategic decisions

Adjust policies


More CLV Resources

http://ClearActionCX.com/cx-books/

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necessary to successfully manage

the customer experience requires

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the internal cooperation needed.”

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Partial List

Customer Experience Optimization Talk Show

Hear interviews with companies such as:Adobe, Aon, CenturyLink, Cisco, Citrix,

Coca Cola Enterprises, Dell, EMC, GE, HP, ICW, Intuit, Kimpton, NCR, Philips, Safelite,

Sungard, SunTrust, Symantec, TELUS, tw telecom, Virgin Mobile, Wells Fargo

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e-books available at ClearActionCX.com/cx-books

or Amazon Kindle:Metrics You Can Manage For Success

Customer Experience Improvement MomentumInnovating Superior Customer Experience

white paper available at ClearActionCX.com/cx-articles

Employee Engagement in Superior Customer Experience: 4 Overlooked Key

Competencies for Sustainable Results

Resources about customer experience optimization

See more at

http://ClearActionCX.com/best-practices

For More About Customer Experience:

www.ClearActionCX.com/best-practices

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Customer Lifetime Value to Prioritize Customer Experience Management

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