Calculating Customer Lifetime Value: CX Mini Masterclass – E22

This CX Mini Masterclass covers the concept of Customer Lifetime Value (CLV), how to calculate this, and why it’s an important metric for the CX profession. Show host and customer experience expert, Julia Ahlfeldt, will help you understand how to leverage CLV to demonstrate the ROI of customer experience and foster buy-in for customer-centric strategy.

Understanding Customer Lifetime Value

Customer Lifetime Value (CLV) is the monetary value  – often measured in contribution to profit – that is derived from a customer during the course of that customer’s relationship with the company or organization. CLV is a great way to help executives conceptualize the financial upside of customer-centric strategies. One of the most prominent and respected thought leaders in the field of customer experience, Jeanne Bliss, often talks about how businesses should regard customers as assets, and customer lifetime value is a great way of positioning customers as assets because it associates a monetary figure with each customer. In episode 21, I interviewed Marnitz Van Heederden, who shared the inspiring story of how he kick started customer-centric change in his business by demonstrating customer value.

How to calculate CLV

To calculate this metric, one should look at the average profit yielded from each customer (or the revenue minus the costs) in a given year, multiplied by the average number of years that a customer is retained. If the relationships have a shorter time-frame, you could just as easily quantify this terms of weeks or months, though most businesses can and should look at these relationships from a long-term perspective, so I recommend years as the unit of measure in most cases.

CLV = average customer profit per year * average length of retention in years

So if the average customer generates $100 of profit for the company each year, and normal duration of the customer relationship (aka retention) is 2 years, the mean CLV among the company’s customer base would be $200. It’s not a stretch to see how this approach helps CX professionals position customers as assets, which is important if you want the business to start making customer-centric strategy decisions.

If you are stumped for how to quantify a profit figure for each customer, I suggest phone-a-friend to one of your colleagues in finance and ask for their help. You’ll want to gather the average revenue figures and the ballpark operating cost for each customer relationship.

If the value of relationships is something that typically grows over time, you could also include this as a growth factor during the course of the average duration of the relationship.

CLV = average customer profit in year one * (1 + rate of growth in customer profit each year) ^ average length of retention in years

Best uses for this metric

Customer lifetime value isn’t a magic number, but it does have a lot of potential applications, and can be very useful for demonstrating the ROI for overarching customer-centric strategies. Major department-level initiatives that impact customer spend, cost of maintaining the customer relationship and efforts that impact customer base growth or retention, should all roll up into CLV, so you can use this metric as a way to connect and unite broad customer-centric objectives into a bottom-line impact through CLV.

I’d suggest looking for ways to utilize this metric in dashboards that are assessed alongside financial results in major business performance or strategic reviews. If you can tie major business change efforts back to CLV as either a projection or a post-mortem, that’s great. It will help executives and department leaders understand how their actions connect back to customer-centric strategy.

Limitations

Just be aware that customer lifetime value is slow to change, is a lagging indicator, and is influenced by a lot of different factors. It may be difficult to pinpoint how minute or incremental changes to the customer journey impact CLV, so don’t expect tweaks to the customer experience to make big waves with CLV. This metric has limited potential as a tool to quantify cause and effect from smaller scale changes. (But don’t worry I cover that in Episode 23!)

If you want to delve deeper into the topic of CX ROI calculations, including an overview of popular methodologies and expert guidance on how to pick the right approach, be sure to check out my Ultimate Guide to the ROI of Customer Experience.

Want to keep learning about CX?

If you’d like to checkout more of these CX Mini Masterclasses or listen to my longer format CX expert interviews, check out the full listing of episodes for this CX podcast.

Decoding the Customer is a series of customer experience podcasts created and produced by Julia Ahlfeldt, CCXP. Julia is a customer experience strategist, speaker and business advisor. She is a Certified Customer Experience Professional and one of the top experts in customer experience management. To find out more about how Julia can help your business achieve its CX goals, check out her customer experience advisory consulting services  (including journey mapping, CX strategy development, experience innovation, leadership workshops and CX ROI measurement) or get in touch via email.