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Mar 30, 2022

What is Customer Lifetime Value (CLV)?

What is customer lifetime value (CLV)? According to the Economic Times, CLV is the “present value of the future cash flows or the value of business attributed to the customer during his or her entire relationship with a company.” In this calculation, customer lifetime value can be understood as the revenue generated by a customer, less expenses, as well as a brand’s estimation of the projected total value throughout the relationship.

Customer lifetime value is often thought of in parallel with loyalty programs, where steady customers accumulate points or rewards based on expenditures. Brands assign value to a customer based on a customer’s spend or the duration of the relationship, and reflect that value through a tiered system of offers, discounts, or other rewards.

Outside of loyalty programs, customer lifetime value is increasingly viewed as an important metric that can be instrumental in a brand’s transition to becoming customer-centric. According to Forrester, CLV “plays a highly strategic role in helping firms achieve organizational alignment, make important strategic business decisions, and pivot toward becoming customer-obsessed.”

Customer lifetime value aids the pivot toward customer-centricity by giving brands a different way to measure the effectiveness of a personalized customer experience (CX). Before exploring how it does this, we should specify that pursuing a personalized CX is a worthy goal as a key revenue driver. In a recent Harris Poll survey commissioned by Redpoint, 39 percent of consumers said they will not do business with a brand that fails to provide a personalized CX. A recent McKinsey article on the value of getting personalization right found that a personalized CX drives up to a 25 percent revenue lift depending on an organization’s ability to execute.

Conversely, traditional KPIs for measuring campaign ROI such as open rates or time on page are not as effective in measuring the impact of personalization. Success in one channel – an email campaign, a display ad, direct mail, etc. – offers little to no insight into how success bleeds into a customer’s subsequent actions and behaviors throughout a customer journey.

That limitation gets to the heart of why brands are turning toward customer lifetime value to gauge personalization. Because a customer’s perception of the experience a brand delivers transcends the channel of engagement, CLV looks instead at the effect of a personalized customer-centric approach throughout not just a single journey, but as the term suggests over the course of the entire relationship with a customer.

Relevance and CLV

In practice, what does it mean when customer lifetime value is the arbiter of success? Take email as an example. Every consumer knows first-hand that most brands aren’t shy about sending emails. Beset on all sides with emails from retailers, health practitioners, service companies, the kids’ school, etc., keeping up with the never-ending parade of communications can feel like a full-time job.

What, though, does your opening – or not opening – an email say about you as a customer or a potential customer? Thinking about your own experience, are you more or less likely to open an email from a brand that sends you a daily email, or one that stands out from the crowd because it is relevant to your journey as a customer? Maybe it was related to a product you expressed interest in, or perhaps it was a perfectly timed offer for a complementary item to a recent purchase.

For data-driven, customer-centric brands, that relevance is not an accident. Rather, it speaks to the strategy of focusing on actions that increase lifetime value rather than the channels themselves. Perhaps a high-value customer prefers not to receive emails at all, or has indicated via a preference center that one email a month is enough. How many brands even ask?

In a true customer-centric approach, the value of an email or any other communication channel is assessed by its contribution to the overarching customer journey. Email frequency is just one example. With CLV as a metric, emails as a next-best action might not even be related to an offer at all. A brand might simply want to thank a customer for their business, or invite a customer to an exclusive closed-door event.

A Personal Understanding and CLV

The throughway to enhancing customer lifetime value is to ensure that every next-best action is in the context of the customer journey. From the customer’s perspective, a seamless, highly relevant omnichannel experience demonstrates that a brand makes a concerted effort to know the customer as an individual.

In the Harris Poll survey, consumers ranked omnichannel consistency as the most important component of customer experience. Furthermore, 82 percent of consumers surveyed said that they are loyal to brands that demonstrate a thorough understanding of them as a unique customer.

With customer lifetime value a measurement of success for executing a thorough understanding, brands must develop a single customer view in order to measure the impact of a personalized CX at the individual customer level. A single customer view, or golden record, is what allows a brand to deliver a next-best action to a segment of one. Real-time data processing from every conceivable data source, combined with advanced identity resolution capabilities and other data quality steps within milliseconds of data being ingested, ensure that a golden record tells a brand everything there is to know about a customer at an individual (or household) level. Automated machine learning and a real-time decisioning engine are key components of an omnichannel CX platform that allow a brand to intelligently orchestrate a next-best action at scale.

Measure Success with CLV

Customer lifetime value is an easy concept to understand – a customer’s worth to a brand over the course of the relationship. Yet because brands and campaigns have been for the most part organized around channels, CLV has often taken a backseat to channel-centric metrics to gauge the effectiveness or ROI of personalization.

With the technology available to provide a hyper-personalized CX to a segment of one, customer lifetime value instead becomes a key metric for how well a brand provides a thorough understanding of an individual customer.

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