In an era when there are more ways to reach consumers than ever, it is essential for businesses to establish and extend customer lifetime value (CLV) in order to maintain profitability according to Mike Richardson, EMEA managing director for Maximizer Software, who here explains how and why companies should determine the projected CLV of both prospects and existing customers before investing strategically in either. This article is copyright 2015 The Best Customer Guide.

This approach is essential to strategic planning, financial forecasts, budgeting, new business development and retention programmes. And what makes CLV so critical is that it looks at profit margin over the life of a customer rather than simply measuring revenues. The fact is a customer providing a decent flow of revenues might not actually be worth the spending needed to attract or retain the business because the margins turn out to be minimal. Yet a customer whose revenues might be average at best might, in fact, be very profitable, justifying further investment to maintain and grow that relationship.

While CLV is an indispensable starting point for evaluating whether a prospect or customer is worth investing time and resource in, it is not a fixed valuation that cannot be increased. A customer that shows at least a degree of value might have long term potential for more impressive profitability, as that client may provide a lot more scope for the sale of additional products and services that they don't use currently - making investment in retention, upselling and cross-selling worthwhile.

Developing client relationships that show potential for a higher CLV involves improving the 'customer experience', which is more than just 'customer service'. Customer experience is the combination of all experiences a customer has had throughout the relationship - from first contact to nurturing to sales conversations to the delivery of service after purchase.

Research demonstrates that customer experience is vital to in building CLV. A report published by Econsultancy showed that 64% of companies rate a positive customer experience as the best way to improve CLV, while a study by Walker Research predicts that, by the end of the decade, customer experience will overtake price and product as they key brand differentiator. Furthermore, Deloitte has found that that 82% of customers view their experience with a brand as a competitive differentiator.

The key to a highly positive customer experience is having access to relevant knowledge. When any representative of a company contacts a customer, they must reflect previous interactions and client preferences. On the other hand, repeated and irrelevant communications, contacting customers during periods they had previously requested not to be contacted and lacking knowledge of prior approaches can erode the relationship. So how does a company avoid this? Being able to tap into a customer relationship management (CRM) system that has captured and provides easy access to relevant records and business intelligence ensures everyone in an organisation can contribute to a positive customer experience.

CLV, customer experience, retention and profitability are all woven closely together in the fabric of a business. The importance of retention in building margins is highlighted in research conducted by Bain and Company, which found that just a 5% increase in customer retention can result in a 75% increase in a company's profitability. However, not all customers are equally profitable, nor do they all have the same potential for profitability. Gartner Group statistics show that 80% of a company's future revenue will come from 20% of its existing customers - so identifying those clients through CLV and working to retain them is vital to future success.

Critical steps for Customer Retention
So what is best practice when it comes to retaining customers? Here are some critical steps companies should be taking:

  1. Complete a customer lifetime analysis on all existing customers
    A simple model can be adopted to identify current key customers, potential key customers, general population customers with a degree of worth and customers who will never be profitable to keep.
  2. Segment the data and create a retention plan
    With the CLV analysis completed, segment the data according to customer worth, creating a separate retention strategy for each segment according to the projected value. It is vital to remember that all customers should still receive excellent service when they interact with the company - it is in the marketing and sales where the real differentiation occurs.
  3. Send the right communications
    A relationship can be tainted if bombard a customer with communications that are irrelevant and unexpected. Use marketing automation software to trigger communications based on customer behaviour, considered one of the most impactful ways to grow a fruitful relationship with customers.
  4. Streamline processes
    If employees are manually undertaking tasks such as call logging, automate these. CRM software will record and track such data automatically and subscribe customers to specific campaigns with a few clicks.
  5. Be varied with your media
    Consumers today expect companies to interact across a range of media, especially digital channels. Social media is becoming particularly important and can be managed via Social CRM. This can help your firm to spot and resolve issues more quickly.
  6. Instil true loyalty
    Work to continually exceed customer expectations with all interactions in order to win loyal advocates. In the digital world, a happy customer can spread the word to hundreds if not thousands - and in certain magical instances, millions - of prospects. Upselling and cross-selling opportunities are also far more likely with loyal customers.

To cultivate the sort of customer-centric business culture necessary for the above approach, it is necessary to get buy-in from throughout the company. This is a top-down process and this 'customer-is-king' culture has to become ingrained in the DNA of the entire organisation - especially the parts of it that are customer-facing. These employees will need the tools, including CRM, to make a customer-first strategy work.

Having a CRM platform that employees can rely on to support a customer-centric approach will result in better marketing and sales interactions, improved service and, ultimately, the excellent customer experience the company is seeking. Indeed, the detailed client information and intelligence available via a properly configured CRM system will feed a seamless, positive customer journey that enables organisations to maximise CLV.

"Failure to understand the importance of CLV and to utilise it in initiatives aimed at both increasing and developing a firm's customer base puts profitability at risk. If the business does not recognise who it's most valuable customers are, it cannot effectively target activities aimed at keeping them loyal, expanding their purchasing, and prospecting for lookalikes," concluded Richardson. "Once a company calculates and analyses CLV, it can do more than focus its customer investment on the right segments - it can then find ways to extend CLV where it has identified further potential."