No one is in any doubt as to the importance the customer represents for a given business. A number of authors like Levitt and Drucker have emphasized this in countless articles. However, few companies use metrics to measure customer value.
What, after all, is “customer value”?
Customer value is associated with customer satisfaction in relation to a business, more specifically to its products and services. The word “value” has several definitions and meanings. Often it is related to price, as in, if I asked you the price you paid for your car. It could also be interpreted as the customer’s judgment of the value of something, in the sense of price paid vs. benefit received (or the customer’s perception of benefit received). As such, value is an analysis that the customer makes of the cost-benefit of a product or service.
Customer value is associated with the satisfaction that the customer feels, or expects to feel, and the return that the company will give them.
But why is it important to measure customer satisfaction and value?
Studies by Rob Markey of Bain & Company show that “the leading companies in their respective segments in terms of loyalty—companies with the highest net promoter scores and customer satisfaction index for three or more years—increase revenue 2.5 times faster than their peers in the same segment and, in the following ten years, provide shareholders with a return of two to five times greater.”
One of the metrics used to calculate customer value calculates the customer’s lifetime value, or CLTV, in relation to the cost of winning the customer. The company can measure how long it takes to recover the investment needed to win the customer, such as the cost of sales and marketing, or how much the customer will pay in a given relationship period, or even correlate these two variables.
Customer value is the metric that indicates the total revenue that a company can reasonably expect from a customer account. It considers the amount of revenue provided by a customer and compares that number with the customer’s expected useful life. Companies use this metric to identify the customer segments that are most valuable to the company.
CLTV tells companies how much revenue they can expect a customer to generate over the course of the business relationship. The more a customer buys from a company during the relationship, the greater the value of its useful life, or Lifetime (LT).
Objectively, CLTV represents how much revenue each customer in your base on average will generate for you during the relationship between them and your company.
Let’s illustrate this with the example of a pizzeria customer.
Say that the customer buys twp pizzas per month, and that the pizza has an average price of $20. If the customer remains loyal for a period of two years, their CLTV will be:
pizza price X number of pizzas consumed in a month X number of months of the relationship:
CLTV = 20 x 2 x 24 = 960
Simple isn’t it?
Now you can calculate your customer’s CLTV.