Lifetime value of customer
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The document discusses the concept of lifetime value of customers. It explains that lifetime value is calculated as the potential revenue from a customer from when they first purchase a product/service until they leave the category. Companies should focus on retaining customers and increasing revenue per customer to maximize lifetime value. They can do this through loyalty programs, incentives, targeted marketing investments, customer segmentation, and cross-selling/upselling. By understanding lifetime value, companies can better invest in their customers throughout the relationship to create stickiness and prevent churn.
Lifetime value of customer
- 1. LIFETIME VALUE OF CUSTOMER Introduction Cliché: “It is far cheaper to retain a customer than to get one”. That said, retaining a customer requires an organisation to provide, on a continuous basis, the quality of service or value that the customer perceives to be better than anyone else in the industry. Perception of better value, in most industries, would be the most important reason for a consumer to continue staying with a brand. When the functional benefit that a brand delivers is taken care of, the brand should focus on increasing the revenue that it derives from that customer… and in the process demonstrating and delivering even higher value to the customer. Retaining customers and selling more to them is what helps you get higher „lifetime value‟. The concept The concept of „Lifetime Value‟ requires an organisation to calculate the potential value of the customer from the time he enters the category (or buys your brand) till the time the customer is likely to participate in the category. E.g. in the case of an Internet service provider, the customer will have a need for the service till he dies. However, in the case of, say, contact lenses, the person gets out of the category when he reaches the age of approx. 40-45 (then he goes on to bi-focals, etc.). The marketing and service focus of the organisation should be on maximising the share of their brand in the purchase of that service or product by the customer. E.g: If a customer is going to buy internet subscription for 25 years, how, can I ensure that he stays with me for, say, at least 20 years?
- 2. In most categories, an organisation can actually drive-up the revenue earning potential form a customer by upgrading or cross selling. E.g: How can I upgrade a customer for a dial-up connection to a leased line? Or how can I market more relevant ‘value added services’ or relevant premium products to the customer? How can an organisation use the concept An organisation can use the „Iifetime value‟ concept in one of the following ways… 1. Create multi-level loyalty programme on the basis of „potential lifetime value‟ 2. Create incentive packages (with or without loyalty/rewards programme) basis the „potential lifetime value‟ 3. Use the concept to make marketing investments (where the investments are evaluated on a per customer basis)… Invest in the customer on an on-going basis – helps you evaluate and track ROI Front load marketing investments in the beginning of the relationship – helps you give a bigger incentive to „try your brand‟ for the first time Keep the incentive proposition towards the middle or end of the relationship – helps you create „exit barriers‟ 4. To segment customers on the basis of „potential lifetime value‟ and target communication messages specific to these segments. 5. Analyse data on purchase patterns/usage habits to help define more profitable consumer segments and divert marketing monies towards them. As brands across product categories become less differentiated, they look beyond product differentiators as platforms to compete on. One key factor, and one that adds to the one critical differentiator - emotional equity, is the quality of service/value-add that the brand is able to provide the consumer outside the functional benefit of the product. Brands will have to invest in creating value in „staying with the brand‟. Brands will have to use the potential of cross-sell/up-sell with incentives or partner with other relevant organisations to offer higher value and thus create emotional or incentive based „exit barriers‟ for the customer.
- 3. Prajakt Raut prajakt.raut@gmail.com Prajakt has over 23 years of experience as an entrepreneur, marketing professional and business strategy consultant. Prajakt primarily consults early stage companies on strategy, focusing on business model & monetization and on creating processes to prepare the company for growth. Prajakt is the co-founder of Orange Cross, a healthcare services management company and an internet based venture, currently in stealth mode. Prajakt is passionate about entrepreneurship. Prajakt‟s personal goal in life is to instigate, inspire and assist a 100,000 people to become entrepreneurs. Prior to his current ventures, Prajakt was the Asia Director for TiE (The Indus Entrepreneurs), a global non-profit organization focused on promoting entrepreneurship. At TiE, Prajakt was primarily focused on helping entrepreneurs in India connect with the emerging early-stage investor community. Prajakt also helped create interconnectivity between overseas investors and Indian entrepreneurs. Prajakt has spent over a decade in advertising and marketing companies including Grey, Madison DMB&B and Capital. Prajakt was also part of the founding team of a printing business and a CRM solutions company. Based in Delhi, Prajakt continues to volunteer time at NEN (National Entrepreneurship Network) to assist aspiring entrepreneurs in their entrepreneurial journey. Prajakt is also a self-taught designer and because of his deep personal interest as well as past experience in advertising, enjoys brainstorming and marketing & communication designing.