Customer Lifetime Value is an important metric and it has potential to be valuable in running a wide range of companies. One thing that is useful with any approach is to say what is it for? So what is CLV for? This seems like too simple a question to be valuable but often that isn’t true. Asking ‘what is this for?’ can sometimes help explain what are the best choices in developing, as well as using the metric.
State Your Aims With A Metric Upfront
V. Kumar (a major academic in the field of marketing analytics) outlined the uses of CLV in a piece for a book on CLV. He outlined things that a CLV based strategy could help with.
“select the best customer, make loyal customers profitable, optimally allocate the resources, pitch the right product to the right customer at the right time, link acquisition and retention to profitability, prevent customer attrition, encourage multi-channel shopping behavior, and maximize brand value”.
Kumar details an approach to calculate CLV. This is high level but useful to give an idea of what is going on. This work was 14 years ago now and looking back with the benefit of hindsight I think it could benefit from an update so I won’t go into too much detail. I will say that I really like the idea outlined in the article. Stating your uses upfront and then outlining how the metric achieves them. Then, ideally, one could review whether the metric worked for all the outlined uses and how. For example, with CLV I worry that subtracting acquistion costs before reporting CLV makes the metric not useful for the majority of purposes it is pitched for see here.
What Is CLV For? This Matters To What You Do
I am a great believer in the approach of saying why, before you say how, and then returning to the why to explain your how choices in creating the metric. There are sopme truly shocking versions of CLV out there. If we are clear what it is for we might be able to get rid of some of the worst ones.
For more on CLV see here.
Read: V. Kumar (2006), CLV: The Databased Approach in David Bejou, Timothy Keiningham, Lerzan Aksoy editors, Customer Lifetime Value: Reshaping the way we manage to maximize profits, Routledge