The Lifetime Value of a Customer and Meaningful Metrics

How do you value a customer? There is an intuitive appeal to number crunchers and financial types in putting a monetary value on each customer relationship. It simplifies things if you can say “Customer X is worth Q, so when we are marketing we can spend P.” There are numerous methods that approximate a value for a customer: some on historic results, others on future “potential.”

If you use historic sales from a customer, you have the uncertainty of whether or not that customer will continue to buy from you, at the same level or at all. You may also have uncertainty of whether that customer will be in business, will ask for price concessions, will become slow to pay, and all the other variables of “normal” business.

If you use future value, you are faced with the same set of questions. Will the customer buy? What will he buy? How often? How much? On what terms? What will it cost to keep the customer: marketing, advertising, incentive? What about the other costs of the business?

Added Value from the Customer

Beyond the direct contribution a customer makes to profits, many models also say that you need to take into consideration the value a customer adds or takes away from your business through “word of mouth”: The promotions, referrals, or (on the downside) the negative comments made about your business. The business you get from happy customers who promote your business to others has a value to you, especially when those customers are ones you wouldn’t have normally reached. How do you quantify that value in your analysis of a customer?

Somewhere Between Physics, Complex Mathematics, and Logic

Businesses are in business to do business, not to spend all their time on complex metrics, score cards, and analysis. Keep your measurements simple, meaningful, measurable, and doable; if the metrics take you a month to produce, then they will do you no good. You need information and indicators; information measured in a timely manner when it can be acted upon to make a difference is important in any system. The performance measures need to be in the hands of the people to be useful. If you develop metrics that require too much time and resources to generate, they won’t be useful (or used). You won’t be able to produce them in a timely manner, so they will become historical markers of things you wish you had known sooner. Find logical indicators that you can generate that will give you meaningful, relevant information that can be acted upon when it will make a difference. Add value to your customer, and you will add to the lifetime of your customer.

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