Customer Lifetime Value
CLV puts a value on the customer relationship; thus, it is a key component in the CRM system. Knowing the customer's value helps an organization determine which customers they want to strengthen their relationship with and which ones they don't. Read this article to explore the concept of customer lifetime value and why an organization needs to utilize it in its decision-making. Focus on the methodology for calculating CLV and think about the variability inherent in each step of the calculation.
Misuses and Downsides
Over-Values Current Customers at the Expense of Potential Customers
The biggest problem with how many CLV models are actually used is that they tend to deny the very idea that marketing works (i.e., that marketing will change customer behavior). Low-value customers can be turned into high-value customers by effective marketing. Many CLV models use incorrect mathematics in that they do not take account of the value of a far greater number of middle-value customers, over-prioritizing a smaller number of high value customers. Additionally, these high-value customers may be saturated (i.e., not have the ability to buy any more coffee or insurance), may be the most expensive group to serve, and may be the most expensive group to reach by communication. The use of survey data is a viable way to collect information on potential customers.