How much are your customers worth to you? (2)

Niels de Veth

Calculate the Customer Lifetime Value

To be successful in customer retention, it's important to know what your customers are worth. Customer Lifetime Value can help you with this. In my previous blog, I explained what CLV is, its importance, and how to calculate it. Now I'm going to tell you how to successfully apply CLV outcomes in your organization.

Once you've calculated the CLV, you can do several things. I recommend starting by creating customer segments. From a CLV perspective, not all customers are equally important – meaning they're not potentially worth the same – to your organization. For an initial classification, you can, for example, create three basic segments based on chosen CLV ranges. In the image below, for example, we assume a percentage distribution of 20-60-20.


Customer lifetime value, percentage distribution



Where RFM relies on historical value, CLV, as mentioned, also incorporates predicted customer value. You can imagine that a combination of both models for customer segmentation is extremely valuable. You want to know to what extent past results guarantee future performance. For example: to what extent RFM Champions also turn out to be CLV Very Profitable Customers. Crossing these segments immediately also yields more targeting opportunities.



CLV and soft customer data

In combination with soft customer data, CLV becomes even more useful. In a Customer Data Platform (CDP), soft customer data is often present alongside hard customer data. This includes preferences and interests based on behavior. Viewing a CLV segment from this perspective gives you the drivers for your marketing campaigns directly at your fingertips. That's a delight for data marketers.

Research shows that the following three tactics are most effective in increasing CLV:

  1. Improvements in customer service
  2. Personalized interactions
  3. Cross-selling and upselling

To demonstrably increase CLV, you need to target carefully curated segments with appropriate offers at suitable times. When you succeed in providing your most valuable customers with a premium experience, it positively influences your marketing ROI.


CLV and duration of customer relationship

The above tactics can also be effectively plotted on the relationship between CLV and the duration of the customer relationship. There are various ways to relate them to each other. In the quadrant below, you'll find a practical example that we often apply in practice. It makes an apparently complex model highly applicable.


CLV and duration of customer relationship


Moving targets

A model is a model. It doesn't represent the complete reality. This also applies to CLV. It's important to realize that you're dealing with predictions based on what you already know about the customer. So, you don't know what you don't know yet. Therefore, stay actively engaged in conversations with your customers to find out more.