Metrics spanning Financial, Marketing, Behavioural and Customer Profile have generated and used in an attempt to convey the fiscal worth of marketing budgets to organisations, especially during tough times. (Milichovsky and Simberova, 2015). However, the metrics used are rarely relating to the primary activities of marketers and their intended goals (Popky, 2015, Katsikeas et al., 2016). Arguments against Financial metrics propose that linking marketing activities with the reporting cycle has had a net negative effect on marketing, with the focus being pushed towards quick sales and increased profits disregarding the true intention of marketing (Rozek and Karlícek, 2014). Whereas more traditional marketing measures such as reach, frequency & recall are viewed as irrelevant to the C-Suite as they do not link the investments in marketing to a monetary return (Milichovsky and Simberova, 2015). Metrics in marketing lack a common language with the C-Suite.
Enter Customer Lifetime Value (CLV). To begin with let me say that this is not a cure-all and nor may it be applicable to all organisations. The truth is no metric is, CLV is an attractive option to move the C-Suite from short term goals to longer, customer relationship focused endeavours (Rozek and Karlícek, 2014).
What is CLV?
The basic premise is summating the value of a customer’s interaction with an organisation over time and then deducting all marketing activities from this to come up with a final figure which should represent future cash flows from a customer at this point in time. (Singh and Jain, 2013). Simple in theory, but in practice things to get a little more difficult, as the major pitfalls of such a calculation require you to predict customer intentions (Singh and Jain, 2013, Stahl et al., 2012, Rozek and Karlícek, 2014).
CLV in Action
The key point of CLV though, and the methods of maximising this are conceptually simple and already in practice. Focusing on the acquisition, retention and share of customer an organisation is able to increase CLV and in turn increase positive cash flows, having a positive effect on shareholder value (Stahl et al., 2012, Nenonen and Storbacka, 2016, Rozek and Karlícek, 2014, Kumar and Shah, 2011). Looking at Apple it’s easy to see that the company has set about maximising CLV. Early on in Apple’s career, huge marketing budgets were spent on advertising to acquire new customers. The company renews product lines frequently to allure new and retain current customers, coupled with a large sales and support force. Whilst at the same time they are continually increasing their ‘share of customer’ by increasing their product line across multiple technology sub-segments.
The strategical use of CLV as a metric to drive specific marketing activities has shown promising success when marketers used CLV as a driver to target marketing budgets to specific CLV customer segments (Kumar and Shah, 2011). In the two company’s tested one raised its stock prices 45% relative to its competitors (B2C) and the other 21% relative to its competitors (B2B). Increasing CLV also increases Customer Equity (CE) which in turn has been linked to shareholder value (Nenonen and Storbacka, 2016). The notion as also that the lifecycle of a customer can be linked to CLV is quite remarkable and reiterates to companies that retention is key and that without it growth cannot be facilitated (Retently.com, 2016).
Shifting from the Short-Term
Marketing as a construct within an organisation is the first to be scrutinised when budgets are squeezed and managers feel pressured to increase profits in time with regular financial reporting (Mintz and Currim, 2013, Milichovsky and Simberova, 2015). CLV may be a metric with the ability to speak to both marketers and the financially driven C-suite in a common language. Marketers see ways to measure and maximise the benefits derived from each customer, the C-suite sees a financial indication of marketing’s efforts. The proven negative relationship with price promotion on customer retention and brand equity (Stahl et al., 2012) generates negative effects for customer relationships and conditions consumers to buy only during sales. For marketers (and the organisation) the true benefit of CLV though is that the focus of customer life-cycle draws out expectations over time and allows marketers to form real relationships with customers (Stahl et al., 2012, Nenonen and Storbacka, 2016, Rozek and Karlícek, 2014).
Criticisms of CLV
Though CLV is not without its flaws. Falling into the category of ‘Discounted Cash Flow’ metric, CLV is victim to several caveats, the most substantial forecasting. The requirement of CLV to forecast future incoming cash flows from customers adds a high level of uncertainty to the equation (Ambler and Roberts, 2008). CLV models also fail to assess other, non-financial benefits, such as network effects and generation of word of mouth (Singh and Jain, 2013).
Though the ideas behind CLV and the notion of shifting short-term objectives to long-term customer relationship goals is exciting. Whether it be CLV or another metric that creates such a shift it doesn’t matter. Treating customers as business is a mutually beneficial ideology and it needs to be measured and expressed to those making decisions but in order to achieve this a common language is needed.
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