Take actionable steps to put the customer at the center of your marketing investment decisions through customer lifetime value (CLV)
At the end of the day, your customers decide who wins in the marketplace. They decide if they’re going to buy from you or your competitors, how much they’re willing to pay, and what they’re willing to pay for.
Companies that are obsessed with their customers are the ones that win. Think of some of the most admired companies on the planet, the customer sits at the center of their mission statements, and everything they do revolves around understanding their customers and meeting their needs.
Principal, Customer Advisory, KPMG US
Customer lifetime value (CLV) — the expected net contribution of the customer to the organization over time — has been around for a long time but is often misunderstood and underutilized. Some of the world’s leading companies lean heavily on CLV; they know its drivers and use CLV-based data, analytics, and intelligence to carefully engineer their go-to-market investments and actions. Whenever they have the opportunity to engage with a prospect or customer, they know the impact these interactions can have on an individual’s behavior over the short- and long-term, as well as across the full ecosystem of products and services offered by the company. With this intelligence, they are able to thoughtfully break through the typical challenges of being myopic or siloed. They’re able to take the path that’s most likely to drive value into the relationship, taking a holistic, short- and long-term view. Not many companies are able to think and operate this way today, but this will eventually be core to every winning company’s success.
1. CLV puts the customer at the center of every decision
Customer-obsessed companies use CLV not just to calculate their customer’s value over time, but to understand the levers they can pull to incrementally drive individual customers toward behaviors that increase their value. These customer-centric business models create a data-driven link among their customers, brand, marketing activities, experiences, objectives, and financial results.
2. CLV enables better prioritization and higher value engagement with customers
There are a lot of companies that wrestle with this question: Should I invest in customer acquisition, or should I invest in upselling, cross-selling, or taking another action with my existing customers? CLV uniquely levels the playing field when wrestling with these decisions, using metrics to show companies when and how they should invest in new and existing customers on multi-dimensional levels.
3. CLV enables intelligent cost-to-serve decision making
Here’s an example of the power of CLV based on what I’ve seen first-hand: Auto manufacturers often offer cash back incentives. With a deep understanding of CLV and customer behavior in place, they may realize they don’t actually need to give thousands in cash back to all of their customers. Many customers will buy without this incentive, while others may require this cash to create, continue, or strengthen a relationship and, ultimately, drive their CLV higher. CLV clarifies cost-to-serve decision making, and in many cases can help companies from throwing significant amounts of profits down the drain.
4. CLV creates a common currency/unified metric to allow better alignment across business units
When companies consider their CLV, they need to ask not only what can I do to drive the best possible value for one division, but also how will that value be applied across the organization. For example, if a car company lowers a customer's car financing, it won’t only impact the financing division, but it may also move them to buy a second car from that company, service that car with that same company, and more. To grow a customer’s value, you need to take a full view of the customer relationship, or you could miss out on opportunities to create value or even destroy its value across different parts of the organization.
5. CLV considers and quantifies both short- and long-term business impacts
CLV, by its definition, considers both the short- and long-term value coming from a customer relationship. And some of the top, sophisticated users of CLV don’t simply take the discount rate applied to future cash flows as a given. There are times when a business needs to focus on driving ‘near-in’ results and acquiring customers that have a higher propensity to churn may help address near-term softness in the pipeline. A higher discount rate in the CLV algorithm (i.e., focus is on near term cash flows) can help find and acquire these customers, who otherwise wouldn’t have been targeted when a lower discount rate is applied (i.e., the future cash flows matter more). The time-based nature of CLV ensures tomorrow is never fully traded off for today, but the level of trading that’s done can be thoughtful and highly strategic.
6. CLV is a great barometer for strength of a company’s business and customer-focused strategy
While using CLV, there’s a sibling metric to consider that’s used in many different industries from finance to telecommunications: average revenue per user (ARPU) or average revenue per account (ARPA). This is a metric that the investor community often uses to understand an organization’s strength of relationship with a customer — and how that is changing over time. Leadership and investors alike often use this to determine the health of a business and its strategy. When this metric is considered together with CLV, companies can transform their marketing to drive customer acquisition, engagement, retention, and advocacy through initiatives that improve short- and long-term company value.
7. CLV is a living, breathing metric that enables continuous improvement over time
With CLV, you’re consistently learning the full, short- and long-term impact of your actions on customers. The key is to use that new intelligence to help you make better decisions going forward. Some of the top brands in the world have invested in their own company’s customer lifetime value programs. Before stunted growth turned into a problem, recognizing that expanding strong brand and customer relationships through CLV measurement has unlocked a new era of growth and drove astronomical value for their shareholders.
8. CLV makes it possible to determine the "next best action"
Make no mistake, every successful company will ultimately use some form of CLV to engineer their customer experiences and to inform “next best actions” strategies on a one-to-one customer basis. With CLV, companies can answer questions like, what is the value of the experiences you are putting in front of each customer? How much am I willing to invest in customers for those experiences? And what are the actions that I should be taking with each customer to proactively help them?
By embedding CLV throughout the organization, companies can achieve improved customer experience and lifecycle management across channels that can help drive ROI growth, reduce churn, increase wallet share, and facilitate higher customer satisfaction. KPMG can help you crystallize your CLV initiatives, bringing cross-industry insights to your organization that help drive value for your customers, your business, and your shareholders.
As one client once said about developing a customer-obsessed mentality: “There’s always more to do.” And I love that he said that because customer-obsession is about constantly understanding and creating new value for customers and the organization — and CLV makes that possible.
Tim Collins, Director, KPMG Customer Advisory
KPMG brings a financial, results-oriented mindset to help companies connect customer-centric operations to business value. For more information on how we can help you with your CLV initiatives, talk to us today.