Strategic KPI: how to assess customer lifetime value?

In a B2B environment, it is estimated that it takes between 3 and 7 years to recoup the initial investments made with a customer. Effectively measuring the proportion of your portfolio that is “effectively profitable” is therefore a key challenge for your organization. At the crossroads of marketing and finance, Valeur Vie Client (or Customer Lifetime Value)dates back to the late 1980s, when the Pareto/NBD model challenged the hypothesis of a “stationarity of the customer base.” In the era of digitized, more comprehensive, and better-controlled customer information, this indicator has been refined to help you boost the profitability of your sales actions. Indeed, the method allows you to move away (for a moment) from traditional indicators based solely on the past value produced by a customer. Here, we project ourselves into the future in order to draw up a forecast of your customers’ behavior.

While there are several methods for calculating Customer Lifetime Value, they all start from the same premise: Start by considering your customer base as an essential component of your assets. Customer Lifetime Value is the discounted sum of a customer’s expected profits in the future. Its calculation requires complex modeling. It involves integrating a large number of behavioral variables (net margin, purchase frequency, demand for interactions, decision time, lead cost, etc.)

A model to “unstandardize” your customer relations

When positioning yourself in competitive and mature markets, it’s essential to be able to identify relevant customer/service pairings that maximize profitability. For example, distinguish between customers who allow you to achieve economies of scale today, and those whose business allows you to exploit a segment that will become profitable in the future. Their current and future purchasing potential differs, as do their expectations. Then optimize your resources according to the specific needs of these customers. Prioritize, determine journeys, and your own criteria for loyalty, upselling, and even customer abandonment.

In practice, good use of Customer Lifetime Value will also allow you to avoid overreacting in certain situations. For example, if a customer leaves, you will be better able to assess whether it is relevant to initiate a (often costly) strategy to win them back, or to save this precious time to better adapt to the engagement cycles of another, more profitable customer in the medium to long term. A strategic “risk to cost” perspective that will allow you to gain boldness in your commercial actions.

Put your entire business strategy into perspective

A Customer Lifetime Value (CLV) assessment model is complex to implement (just as your customers are complex entities). Often, the lack of automation in data processing leads to the abandonment of this practice. The Incenteev solution allows you to track customer lifetime value assessment data in real time (such as the evolution over time of the cost/opportunity ratio of a sales visit).

Finally, it’s important not to focus solely on purchase potential: referrals are also a source of value. A low-profit customer who will save you significant acquisition costs through relevant recommendations must have a place in your model.

And you? What criteria do you use to define your customers’ Customer Lifetime Value? Feel free to share your experience implementing and measuring the results of this essential KPI in the era of data management.