According to Gupta, et al, (2006), many agencies are increasingly generating revenue from the creation and sustenance of long-term relationships with their customers, which can be measured by customer lifetime value (CLV), which is defined as the total worth of a customer to a business over the entirety of the relationship. In an agency environment, marketing can maximise CLV and customer equity where Venkatesan and Kumar (2004) state, CLV can be used as a metric for customer selection and marketing resource allocation by enabling managers to maintain or improve customer relationships proactively through marketing contacts across various channels and to maximise CLV simultaneously. This is due to customers who are selected on their lifetime value providing higher profits in the future, over those who are selected on other metrics.

But what makes CLV so special of a metric? According to Skok (2009), he states the biggest reason start-ups die is because their customer acquisition costs vs their customer lifetime value costs often look like this:

This can be attributed to many businesses focussing on transactional customer value, and not investing in the experience that happens after the conversion. This shows the importance of relationship marketing which can be defined, by Gronroos (1994), as identifying and establishing, maintaining, and enhancing, and when necessary, terminating relationships with customers and other stakeholders, at a profit, so that the objectives of all parties involved are met. Relationship marketing has moved from transactional marketing to a one-to-one marketing method that values the needs of the ‘people’ involved within a series of exchanges, increasing the CLV.

How to calculate

Knowing the CLV of a client is a good indicator of how prosperous the relationship can be, against those offering single projects or a retainer contract. Click here to see how HubSpot looks beyond a variable to estimate the costs and opportunities for a client in the long-term by showing how it is calculated for an agency client.

Benefits of focussing on CLV

CLV can have many benefits for customer selection and marketing resource allocation. The following points highlighted by Clark (2010) show the benefits of focussing on CLV and how they can be incorporated into strategic business decisions:

• CLV for different customer segments – different customer segments have different CLVs. Resources can be allocated by employees being able to focus on those with high CLVs. It can also be used to decide whether to follow up on individual customers.
• Market communication – as John Wanamaker said: “I know that half of my advertising costs are wasted. I just wish I knew which half.” Organisations can achieve better results by choosing target groups, communication channels, and the message to be delivered using CLV. Companies can move from the mass transactional marketing method to a more relationship marketing method allowing direct customer communication.
• Managing the sales force – CLV could be used to allocate sales resources, by focusing on those with high potential CLV.
• Marketing campaigns – once the customers are identified, marketing resources can be allocated by focusing on those customers with above-average CLV. Cross-selling campaigns can be targeted at customers who have been defined and selected using CLV.
• Market segmentation – as Kim, et al, (2006) state, it’s useful for market segmentation, strategy development and the allocation of marketing resources for acquisition, retention, and cross-selling.

The above shows that with CLV, it’s possible to use this as a metric for customer selection and marketing resource allocation for a B2B agency.

The challenge of CLV for an agency

With multiple ways consumers can engage with brands, and the ease for consumers to switch agencies, the barriers to measuring and acting on these are challenging. Chahel (2014) backs this up by identifying that the multichannel digital age is hindering brands and companies from calculating CLV, with Econsultancy’s new ‘Building Loyalty and Driving Revenue in the Digital Age‘ report looking into the issue further. Having surveyed almost 900 agency and company respondents, they found that the vast majority agreed that CLV was an important concept, but just 42% said they were able to measure it. Some stated:

“It’s difficult to put in place, particularly if a brand has many different product categories,” says Neil Costello, head of marketing at Aviva.

“It’s difficult to calculate because there are so many different parameters and demographic and macro influences that will shape the calculation process.” (Chahel, 2014).

Below shows what was hindering the respondents’ ability to increase CLV:

One of the challenges is that many organisations simply are not set up to manage lifetime value, with 35% of respondents saying the siloed nature of their organisations and lack of coherent marketing hinders their ability to increase CLV.

With the study finding that each industry sector has its own challenges in building CLV, as each is different, in the future, to improve their CLV, 64% believed improved customer experience would make the biggest impact:

 

Other limitations of the CLV formula is that it does not measure changing customer revenue and costs over time as according to Malthouse & Blattberg (2005). It assumes that the retention rate is stable and does not change over time, making it an inappropriate method for companies pursuing increased loyalty marketing goals. As the formula is measured ‘now’, it does not apply discount rates to future customer revenue and costs resulting in the value being overstated (Fripp, 2015). This can negatively affect an agency, as some work is on the basis that they can offer discounts on future jobs due to loyalty, but others work on a set price structure, so this will affect the company depending on what pricing strategy they use.

Click here to see other metrics that could also be used

Is CLV worth it?

As the above shows, and Rust, et al, (2000) state, CLV has a central strategic importance for an organisation, with more and more managers discovering that their most important asset is not the company’s inventory, but its customers. But many are finding it difficult to measure. Venkatesan and Kumar (2004) suggest that there is potential for improved profits, when managers design resource allocation rules that maximise CLV if managers allocate marketing resources efficiently across customers and channels of communication, but these need to be effectively identified first.

Overall, CLV is important for organisations, but only if measured accurately. Charlton (2014) states that 89% see customer experience as a key factor in driving customer loyalty and retention, while 76% see CLV as an important concept for their organisation, which backs up Econsultancy’s ‘Building Loyalty and Driving Revenue in the Digital Age‘ report.

Many organisations as according to Skok (2009) have business model failure when the cost to acquire customers exceeds CLV, showing that to have a successful business, organisations must have the ability to monetise those customers with a well balanced business model as shown below. But to have this successful model, CLV must be measured accurately and effectively which is proving the hindering factor for many agencies.

 

To say that CLV is the only metric you need is a strong statement, but it is a front runner. Why? Because if you don’t know how much your customers are worth, you’ll never know how much to spend on acquiring or retaining them. It should not be entirely relied on as the only metric, but should be a main focus in your strategy.

You may find these other articles of interest:

10 tactics for increasing your customer lifetime value and loyalty

Customer lifetime value prioritises customer experience management

Choosing the right metrics to maximise profitability and shareholder value

References

Chahal, M. (2014) The challenge of customer lifetime value. [Online] Available at: https://econsultancy.com/blog/64659-just-42-of-companies-are-able-to-measure-customer-lifetime-value/ [Accessed: 19 Apr. 16]

Charlton, G. (2014) Just 42% of companies are able to measure customer lifetime value. [Online] Available at: https://www.marketingweek.com/2014/06/04/the-challenges-of-customer-lifetime-value/ [Accessed: 19 Apr. 16]

Clark, P. (2010) The 16 business benefits of customer lifetime value. [Online] Available at: http://www.thewisemarketer.com/features/read.asp?id=119 [Accessed: 19 Apr. 16]

Fripp, G. (2015) Advantages and imitations of the simple clv formula. [Online] Available at: http://www.clv-calculator.com/customer-lifetime-value-formulas/simple-clv-formula/for-against-simple-clv-formula/ [Accessed: 19 Apr. 16]

Grönroos, C. (1994) From Marketing Mix to Relationship Marketing: Towards a Paradigm Shift in Marketing. Management Decision, Vol. 32 Issue 2, pp.4 – 20

Gupta, S., et al, (2006) Modelling Customer Lifetime Value. Journal of Service Research 9.2. 139-155.

Kim, S. et al. (2006) Customer Segmentation And Strategy Development Based On Customer Lifetime Value: A Case Study. Expert Systems with Applications 31.1. pp 101-107.

Rust, R., Zeithaml, V., and Lemon, K. (2000) Driving Customer Equity. New York: Free Press. Print.

Skok, D. (2009) Startup Killer: The Cost Of Customer Acquisition. For Entrepreneurs. [Online] Available at: http://www.forentrepreneurs.com/startup-killer/ [Accessed: 19 Apr. 16]

Venkatesan, R., and Kumar V. (2004) A Customer Lifetime Value Framework For Customer Selection And Resource Allocation Strategy. Journal of Marketing 68.4. 106-125.