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Navigating Customer Lifetime Value ConundrumDocument Transcript
For Customer Intelligence Professionals June 3, 2011 Navigating The Customer Lifetime value Conundrum A Decision-Making Framework For Lifetime value Analysis by srividya sridharan with Suresh vittal and Allison Smith ExECUT I v E S U M MA Ry Customer lifetime value (CLV), a forward-looking indicator of customer profitability, became common parlance as relationship marketing gained momentum. However, calculating CLV remains a significant iterative process within organizations and is often fraught with challenges in each step. At best, organizations arrive at close estimates based on how they choose to design the model. But the process remains expensive, error-prone, and often lacks real-world application. The effort required to prepare for and progress through model development is where customer intelligence (CI) professionals need to do the heavy lifting. To help, Forrester recommends a three-phased approach to determine lifetime value. dispel mytHs tHat undermine lifetime value analysis Forrester defines customer lifetime value as a customer’s potential monetary worth through the course of his or her relationship with a business.1 CLV is a powerful metric that potentially affects marketing execution across the entire life cycle — customer acquisition, targeting, and retention — and ultimately drives firm equity and shareholder value. It enables marketers to make resource allocation decisions with greater certainty and forces differential treatment of customers based on profitability. Given the broad applicability, it’s not surprising that marketers struggle with many misconceptions when it comes to CLV: · CLV derived from calculators is adequate. Ready-made CLV calculators do not capture the complexities in lifetime value analysis but are a good beginning, especially for organizations without analytical support. But firms that rely only on the output of a CLV calculator to design marketing programs compromise the accurate assessment of customer profitability and, in turn, are prone to mistaken treatment of customers based on value. · Customer value only means financial value. To compute CLV, it is vital to determine the value- generating activities of the customer. In its most basic form, a value-generating activity is when order becomes cash (i.e., when a customer transacts with the firm). But often other customer behaviors, such as social media activity, also generate value for firms although, in the short term, these may not always translate into dollar terms. For example, customers generate social value based on the strength of their influence, reach, and the value of their networks in social spaces.2 Firms that ignore nonmonetary value risk miscalculating the real value that customers bring to the firm. Headquarters Forrester Research, Inc., 400 Technology Square, Cambridge, MA 02139 USA Tel: +1 617.613.6000 • Fax: +1 617.613.5000 • www.forrester.com