Customer Lifetime Value Indices

     A valuable use of CLV is to differentiate customer segments with high CLV from those with low values. Relative CLV for different customer segments may be calculated based on different costs of acquisition and retention. These measures are a CLV index. These indices can range from 0 for the customer segments of lowest asset value to 1 for the customer segments with highest asset value. Companies ranging from financial institutions like banks and insurance companies, to retail and technology companies use CLV indices to distinguish between segments of customers, empowering front line sales to provide offers appropriate to customers of differing CLV – to maximize potential value of their portfolio of customer assets.

Customer segment Lifecycles- Illustrative example

     A gasoline service station in Sacramento California, near Interstate 5, the main north-south highway on the US West Coast, targets three very different customers.

Segment 1: Neighborhood customers

     Characteristics – very regular repeat customers, usually start buying when they move into the neighborhood and stop buying when they move out. – See Table 3 for the Relationship Lifecycle

Segment 2: Interstate Truck drivers

     Characteristics – repeat customers who make large purchases each time. Some have regular routes that take them past this gas station, others irregularly pass this station. – See Table 4 for the Relationship Lifecycle for Segment 2.

Segment 3: Leisure and Business drivers taking I-5

Characteristics – one-stop customers, looking for the cheapest gas, a bathroom or both. See Table 5 for the Relationship Lifecycle for Segment 3.

     Customer Lifetime Value can be used to evaluate the value of the average customer in each of these segments. Tremendous insight into what it takes to pursue these segments of customer is already gained by creating the lifecycle tables to determine what would or could be done to attract and retain different types of customers with different needs and different priorities. For Segment 2, the Interstate Truck Drivers, CLV can be used to evaluate what the breakeven point is for numbers of trucks per day or per week, in order to be able to cover the investment cost of creating a Superior Food and Rest Stop. Depending on the location of other competitive gas stations and the services they offer, CLV might end up positive or negative. Negative Customer lifetime value indicates that the operational lifecycle profits do not cover the investment cost.

     All calculation of Customer Lifetime Value requires a working model or a hypothesis of what the customer relationship lifecycle looks like. What are the stages of the relationship, and what activities help to move customers from one stage to the next stage to achieve happy customers?
This is what is called a Predictive Model. Predictions must always be tested. The Model must be constantly revised so that the predictions can be more accurate. By using the scientific method, a business can get better and better at calculating CLV.

     Once you know the CLV of a customer segment, you then know how valuable those customers are to you, and how much it is worth to you to invest in getting more of those customers from that segment to be part of your customer base

     Harrah’s casino started their CRM initiatives more than 10 years ago. They started collecting this data, making hypothesis, testing their understanding. They stay ahead of their competition because they are always learning better ways to service their customers, which result in profits to the bottom line.

     Shouldn’t you be doing the same?