The Only Metric That Matters: Customer Lifetime Value

August 4, 2019 Michael Collins


More than ever, companies know that profitable revenue growth comes from attracting and retaining customers. To do this, companies continue to invest in people, process change, and technology to provide a great customer experience (CX). 

A happy female customer wearing blue making a transaction at a POS

But how do companies decide which initiative to invest in? And how do they know if the investment paid off?

Studies show that customer experience has a direct impact on four key business metrics:

  • Share of wallet -- Consumers are willing to spend up to 16% more on products and services with companies that offer a better experience. (1)
  • Cost of service -- Unhappy customers are expensive because, for example, they are more likely to return products or more likely to require support. For example, Sprint found that as part of their focus on improving the customer experience, they’ve managed to reduce their customer care costs by as much as 33%. (2)
  • Customer churn -- More than half of Americans have scrapped a planned purchase or transaction because of bad service, and 33% say they’ll consider switching companies after just a single instance of poor service. (3)
  • Increased customer acquisitions -- A good customer experience helps you attract new customers. In one study, 76% of customers who had a friendly interaction with a brand said they were likely to recommend it to a friend. On the flip side, 82% of customers who had an unfriendly interaction said they were unlikely to recommend the brand. (4) 

Customer Lifetime Value (CLV) is a metric that encompasses all four of these customer experience-related variables. Below is an illustrative calculation of CLV:

Customer Lifetime Value (CLV) calculation

For companies focused on customer experience, Customer Lifetime Value is a balanced, comprehensive metric that helps in making investment trade-offs: 

  • What is the value of reducing Cost To Serve through our CX programs vs. the cost of implementing the program? 
  • Will our investment in AI pay off in increasing Revenue Per Customer? 
  • Should we focus our CX efforts on customer churn or on new customer acquisition? 

At Appirio, we focus on the “Experience Gap” with an experience-led approach to CRM implementations. Our belief is that companies do not expect only implementation and user success in their CRM technologies -- they are looking for operational and financial success as well.

CRM Experience Gap across four pillars

Customer Lifetime Value is a leading (rather than lagging) metric for determining financial success. By tracking the components of CLV -- Share of Wallet, Cost of Service, Customer Churn, and New Customer Acquisitions -- companies can gauge the effectiveness of their CRM investments in real-time. This allows you to make course corrections regarding how and where CRM investments are made, helping to ensure the ROI meets the company’s expectations.


Footnotes:
(1) PWC, “Consumer Intelligence Series: Experience is Everything”, 2018
(2) Harvard Business Review, “The Value of Customer Experience, Quantified”, August 1, 2014
(3) American Express, “Customer Service Barometer”, 2017
(4) CXweek, “Using Twitter To Create A Customer Experience That Gets Results”, March 29, 2017

 

About the Author

Michael Collins

Michael Collins is a Management Consultant in our DSX Strategy Consulting practice. He has more than 20 years’ experience helping companies with large-scale business and technology transformations. Michael specializes in developing experience-driven CRM strategies that lead to positive business growth.

Follow on Linkedin More Content by Michael Collins
Previous Article
Tackle the 3 Challenges of Implementing Marketing Automation
Tackle the 3 Challenges of Implementing Marketing Automation

Next Article
Making a Case for Einstein Analytics in Higher Education with Actionable Insights
Making a Case for Einstein Analytics in Higher Education with Actionable Insights