CLV and Customer Relationship Management (CRM)
The customer lifetime value equation essentially views a customer as an income stream. So instead of considering the customer’s purchases as single transactions, the marketing focus becomes creating ongoing series of profitable transactions. These ongoing transactions are created through customer relationship management practices and strategies – with the success of CRM activities being measured by improvements in the firm’s customer lifetime value.
Customer relationship management or CRM developed in the 1980s primarily through service firms that had direct contact with their customers. Prior to that time it was essentially a business to business marketing strategy. CRM became very popular marketing concept in the 1990s and is still quite critical to many service industries.
The concept of customer relationship management is to manage individual customers (or segments customers) through various relationship stages. Ideally we take a non-consumer (sometimes referred to as a prospect) and progresses through a series of relationship stages that sees them becoming a first time customer, then a loyal customer, and then a supportive advocate. Please note there are numerous relationship models with slightly varied terminology that discuss the CRM stages.
In most cases, a first-time customer is really making a trial purchase and may never repurchase the product/brand again. There are also likely to buy in small quantities initially. Either way, it should be clear that a first-time customer is generally relatively low in profit the firm.
If we use the banking sector as an example, a first-time customer to a bank is usually likely only to open a savings or transaction account. While there are exceptions to this outcome, this is generally the case for most first-time customers. Therefore, the bank will look to grow the relationship with the customer – increasing the share of customer (known as share of wallet in the banking sector).
To do this effectively the bank considers the customer’s profile, how long they have been a customer, how valuable they are, and so on. They will then look to manage that relationship and try to progress the customer to a more valuable relationship by selling them or expensive or additional products/services.
However, this is not always the case, and some customers will remain low profit customers ongoing. If the bank identifies that the customer is relatively unresponsive to the additional offers, then they would probably increase the customer’s lifetime value by reducing the bank’s marketing activities and support that are targeted at that consumer.
This highlights a direct relationship between the goals of customer relationship management and customer lifetime value. With customer relationship management, we are considering the customer (or a segment of customers) and determining the most appropriate course of action – that is, various marketing activities and campaigns and people interaction – that will enhance the relationship with the customer, so it becomes more profitable to the firm and more beneficial and convenient to the customer. Typically, customer relationship management should be a win-win scenario for both the firm and the customer.
Customer lifetime value is a key marketing metric that allows you to measure the impact and outcomes of the firm’s customer relationship management strategies and tactics. As highlighted in the banking example above, some customers may not be responsive to cross selling activities. Therefore, increased up selling costs may result in a reduced customer lifetime value.
Increasing customer lifetime value is not simply a matter of spending additional money in customer acquisition, retention and up selling – rather spending the money appropriately across those three areas, depending upon the value, potential and responsiveness of the customers (segments) involved.