Is there one ultimate measure of performance? For almost every business, using almost any business model, the lifetime value of a customer provides more insight than any other single measure. Every business leader should understand the role it plays in measuring the performance of their organization, and every business leader should know the performance of this one metric relative to their past performance by customer, by channel and by opportunity.
Why Should You Know the Lifetime Value of a Customer?
Every employee’s job is more than just putting out fires. Employees think in terms of transactions and problem solving. That’s what they focus on each work day. The lifetime value of a customer serves as a constant reminder that the energy and effort expended to service any customer or account must always be less than the revenue it generates (except in specific circumstances). Sometimes even senior leaders get fooled into thinking that the highest revenue generating accounts are most responsible for their success. They could be the biggest drain. And sometimes it isn’t even a customer channel that drives profitability. In some business models it is a partner, handling multiple customers, that generates the most profit and therefore should be the most protected. Knowing prevents the misallocation of limited resources.
Employees need to understand what drives long-term success. The lifetime value of a customer is often thought of in terms of the difference between revenue and expense, but it is actually a balance between revenue, expense and time. Employees will often think in terms of generating more revenue per customer or reducing expenses, but adding the element of time makes them think about their relationship with the customer. It forces them to connect the customer to internal business processes, attempting to improve this relationship at each interaction, and even think about how to extend that relationship to the maximum possible length. A greater lifetime equates to greater potential profit.
Business isn’t a short-term game. Quarterly earnings force management into a short-term mindset that can be detrimental to long-term success. Customer lifetime value as a primary management metric challenges this thinking and places emphasis on sustainability. It forces sales, account management and operations into considering where an account is going, what larger opportunities there are to generate more revenue or cut costs, and also assign resources across accounts in a way that properly apportions them based upon their true contribution to the organization’s success.
The lifetime value of a customer is the measure of net profit any account or customer will contribute over their lifetime. It provides the proper perspective for management on the revenue versus expense relationship for the account that should be used to make decisions. However, calculating net profit per account or customer, for most organizations, is top of the food chain business intelligence information. It is often unavailable or a simple heuristic analysis.
As a substitute while working to calculate true CLV, begin by using a CLV-equivalent: expected customer lifetime revenue. This provides employees with the broader perspective of CLV, and still helps get them focused on the long-term performance. Use good information when perfect information isn’t available.
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David F. Giannetto helps organizations leverage information—providing both the technology and methodology necessary to create, understand and utilize it to improve performance. Widely respected as a thought-leader in the areas of business intelligence, enterprise performance management, information management and analytics, he has led some of the most complex information-driven initiatives for today’s leading brands. He is author of two books, including The Performance Power Grid (J.Wiley & Sons, 2006), one of today’s leading performance management methodologies. He is SVP of Performance Management for Salient Management Company.