Calculating customer value
Calculating customer value
Insight

Calculating customer value

Brand loyalty. Lower costs. Increased sales and profits. These are just some of the key benefits of quantifying the long-term value of customers. Getting it right requires the CMO and CFO to work together.

Growing customer demand for more personalized, high-value experiences is putting pressure on marketing functions to quantify the impact of their efforts to build loyalty. The Customer Lifetime Value calculation forecasts the revenue and profit associated with developing a long-term relationship between a customer and their organization. This calculation then drives marketing spend decisions, including which customers to target and which activities to renew or drop.

A lack of data and analytics modeling expertise, emerging technologies and technology channels and the focus from products to customer experience have made the already difficult task of calculating CLTV even more challenging.

To develop a robust customer valuation calculation that can inform marketing decisions for the long-term, CMOs need to work collaboratively with the CFO and finance function. By working hand-in-hand with finance, the CMO can ensure that their calculation is fiscally sound, considers the appropriate inputs, and is derived based on accurate and reliable data.

Getting started

  • The CMO and CFO should begin their collaboration by defining CLTV and the most appropriate formula for the firm and its objectives. This will include identifying what data is available and what actions might be required to collect and cleanse the information.
  • When data due diligence is completed, the CMO and CFO can build and refine the CLTV model. Revenue and cost methodologies can be determined and customer profitability can be calculated. Ongoing testing will be required to ensure the model continues to drive the information the company needs to make decisions over time.
  • With a confirmed profit calculation in place, the CMO and CFO can work with analytics to generate CLTVs for different customer segments. Analytics should apply modeling techniques to validate the predictive strength of the CLTV model. When the CMO and CFO have a CLTV model they believe is usable, they will then need to focus on creating standard processes.
  • The CMO and CFO will need to educate the organization on CLTV and help all functions that touch the customer incorporate CLTV into their investment decision making.

By working together to develop a robust and well-supported calculation for measuring and predicting CLTV, CMOs and CFOs will be in a better position to make decisions on the best places to invest to build profitable, long-lasting consumer relationships. Learn more about CLTV challenges and strategies here.