Customer Lifetime Value (CLV) – the present value of the likely future income stream generated by an individual purchaser trying to understand which customers are worth keeping and which aren’t,
using data-intensive procedures to identify top customers in terms of their likely future purchasing patterns , says Wharton marketing professor Peter Fader
The goal is not only to identify customers, but to reach out to them through cross-selling, up-selling, multi-channel marketing and other tactics – all of which are tied to metrics on attrition, retention,
churn and a set of statistics known as RFM – recency, frequency and monetary value.
Expenditure P V @ 20% N P V
Customer A $ 1000 $ 1092 $ 92 Positive NPV
Customer B $ 1000 $ 1188 $ 188 Highest NPV
Customer C $ 1000 $ 996 $ - 4 Negative NPV
Customer D $ 1000 $ 1142 $ 142 Positive NPV
Table: PV for Customer Lifetime Value (An example by writer).
Just like CLC the concept of CLV has been energized by the increasing sophistication of the Internet “which allows companies to contact people directly and inexpensively.” CLV, Dreze says,
“sees customers as a resource [from whom] companies are trying to extract as much value as possible.”
Yet many companies are discovering that CLV
which is one component of Customer Relationship Management (CRM) – remains an elusive metric. First, it is hard to calculate with any degree of certainty; second, it is hard to use.
CLV, say Bell and others, works best in industries where there is a high cost of acquiring or retaining customers, such as in financial services, airlines and hotels. “It’s also useful in situations
where you have a skewed distribution of transactions – i.e. where a small number of people drive most of the business, as in hotels – and where firms can offer rewards
and inducements to affect customer behavior,” Bell notes. An example would be airlines companies that can upgrade passengers
to first class – a benefit that is considered big to the passenger but whose cost to the company is small.
Collecting data on CLV can offer particular companies a number of benefits, Bell adds. For example, the individual transaction data collected by a hotel helps the company identify its best customers
and cross-sell them other products. It also allows company marketers to target that group for customer feedback. Using that feedback, the company can then make smarter decisions
about where to most efficiently allocate its marketing resources. Suppose the data shows that a significant percentage of the customers come from
upstate New York and are in their 50s; the hotel can use that profile for more accurate outreach, he notes.
The availability of an integrated customer database, and an analytical expertise is required to get the advantages of IT network implementation and the effectiveness of appropriate software used.
It has to be clearly defined the operational purpose software such as call centre operation, marketing response automation and an analytical purpose software for deriving customer data for marketing plan.
The such platform enables company to establish a sensitivity real-times changes to the way they interact with customers based on the CLC –knowledge
and awareness of the second curve’s new paradigm.
The availability of an integrated customer database, and an analytical expertise is required to get the advantages of IT network implementation
and the effectiveness of appropriate software used. It has to be clearly defined the operational purpose software such as call centre operation,
marketing response automation and an analytical purpose software for deriving customer data for marketing plan.
The efficiency of CRM application should be taken into account, among others infotech network investments,
the possibility alternative of virtual network will lower the cost capital of it, selective database development, and suitable software.
“Customer relationship management requires leveraging your knowledge about each of your customers to make each touch or interaction with him or her satisfactory to the customer
and profitable to you in the long run. Although CRM technology, a cross-functional business strategy and the appropriate organization structure and culture
can help you do this, there is another key to managing customer interactions – understanding the customer life cycle.
The purpose of the customer life cycle is to define and communicate the stages through which a customer progresses when considering, purchasing and using products,
and the associated business processes a company uses to move the customer through the customer life cycle. The coverage of CRM procedure to the customer life cycle,
provides a mechanism for prioritizing systems projects and for understanding the information required by specific customer interactions”.
(Building the Customer-Centric Enterprise, Part 1 By Claudia Imhoff and Jonathan G. Geiger and Lisa Loftis Article published in DM Review in November 2000)
To calculate the additional profit associated with a CRM implementation require the covering of all other cost variables in order to get the result of return on investment.
In bigger-scale implementations the task of measuring return must be accompanied by a simplification of product processing procedure as pre-action by applying activity based costing program.
A series number of outcomes from CRM implementations such as improved customer service, better anticipated new demand will be more representative
if be combined by financial indicator as return on investment, and return on asset.
The concept of knowledge management is based on the necessity for synchronizing the capabilities of advanced information technologies and human tacit knowledge, creativity, innovation and its dissemination through out the network to the whole organization.
It is necessary to develop better understanding of Knowledge Management as enabler of information strategy for the effectiveness of customer relationship management. The information-processing
perspective of Knowledge Management becomes more relevant to this marketing policy. A number of examples from the world of net businesses shows the shifting from the conventional world of business
to the new world of e-commerce as the awareness of the emergence new paradigm of the second curve business life cycle. More understanding of the relevance of knowledge and Knowledge Management
is expected to contribute to CRM as part of an integrated effective e-commerce strategies that result in increased business performance.