Customer lifetime value (CLV) is an important business metric. It provides management with a view of how much repeat business they can expect from customers. In turn, the revenue projection arising from that calculation can provide an overview of how much they need to spend on retaining customers.Typically, CLV is computed as follows:
(Average Value of Purchase) x (Number of Repeat Transactions) x (Average Retention Time in Months or Years for the Average Customer)
So, for example, a magazine subscription would be calculated as $50 every year for a 3-year subscription. The equation would then read:
$50 year x 3 years = $150 in total revenue
Asking Questions About Improving Customers’ Lives
However, a recent article in the Harvard Business Review points out that CLV has a role to play in measuring innovation — and in measuring how innovation can change the health and wealth of customers. All the innovative digital companies, like Netflix, Facebook, Apple, Amazon, and Alibaba have what the author terms a “CLV sensibility,” where improving the customer experience and the customers' overall health and wealth matter.
Why? Because they see innovation as a type of investment in human capital — of their customers, as well as their employees.
The piece suggests that questions be asked about the ideal CLV measurement by having managers complete the sentence:
“Our customers can be more valuable when…”
Most people will start with standards answers, such as “when they buy more of our product” or “when they are reliable customers.”
But, if managers are pushed to go deeper about what customers could provide to companies, the answers get more creative.
The answers could be such things as:
“When they give us good ideas”
“When they try our new products”
“When they share their data”
“When they promote our products on social media”
These types of answers lead to collaboration with customers and mining customer experiences and ideas to innovate. That’s a deeper, and ultimately more valuable, measure of CLV. It can lead to innovative ideas that are readily embraced by the user base.
The article also points to a potential separation of customers into tiers. If companies have best customers and typical customers, for example, it may be valuable to ask questions about each category. The answers to “our best customers become more valuable when…” and “our typical customers become more valuable when” could be very different.
This exercise could potentially optimize best customers, for example, into collaborators that could be made better by innovative products they have identified as a need. Typical customers might be identified as social media promoters, or simply as valuable repeat business, and targeted for retention campaigns.
CLV is a valuable metric for business. But with a deeper set of questions, customers and the companies they buy from can develop a much richer and mutually beneficial relationship together.