Show me the Money: Using Customer Lifetime Value to guide your CX plans

I’m just going to come right out and say it: none of the Customer Experience (CX) related metrics out there provide the results-focused discipline needed to drive a business.  Most of them focus on measuring customer sentiment that theoretically will drive loyalty and word of mouth (NPS, Satisfaction) or reduce attrition (Customer Effort, First Contact Resolution, complaints).  Often the value of these metrics must be taken on faith, with no better benchmark of target performance than industry peers and aspirational comparatives like Apple and Amazon. 

Faith, like hope, is not a strategy.

This is a major issue for CX professionals as they struggle to identify and gain support in the C-suite for the right areas to invest.  At best, these faith based measures can only identify major issues in brand promise and service delivery.  But they fail to provide the detailed roadmap for defining the business return from CX efforts, how good a process needs to be, and how to balance the trade-offs of experience with profitability. 

Enter Customer Lifetime Value...

A month ago I had the chance to present on how to tie financial impact to customer experience at a Consero CXevent.  Surrounded by some of the brightest practitioners across industries, many lamented at the challenge of getting C level executives to support their initiatives.  This isn’t because executives don’t care about CX.   Rather CX often fails to gain traction because compared to hardcore metrics like sales, operational cost, and profit, CX requires a leap of faith where you are never quite sure how far you need to jump and for what return on investment. 

In order to translate their objectives in financial and marketing terms that are core to business strategy, I recommend the CX industry adopts Customer Lifetime Value (CLV).  

CLV is: the present value of the future cash flows attributed to the customer during his/her entire relationship with the company.   Financial folks should notice the similarity with an annuity value calculation. Stated in simple format (ignoring the NPV element for now):

CLV =  Cost to acquire a customer –((Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time))

For example: A cell phone company spends $200 to acquire a customer.  This customer spends $40 every month for 3 years and it costs the company $20/month to service. The CLV of that customer is:

($40 -$20) X 12 months X 3 years = $720 minus the acquisition cost of $200, so CLV =$520.

This seems straightforward enough, but the implications to the business are profound. 

1. Acquisition cost (cost of the annuity):  If an average customer generates $720 in profit, the cost of acquisition must be less than that to generate positive returns.  CX efforts that can prove they reduce cost to acquire positively impact the ROI.
2. Annual revenue (annuity premium): if through superior service the business can prove an increase in revenue per customer, say by cross or upselling additional services, they can substantially increase the total margin.  Any investment in CX to do so must be justified with the cross sell revenue it drives.
3. Longevity of relationship (annuity term): At least as important as the annual revenue is the longevity of the relationship (retention).  The longer they stay a paying customer, the more the customer is worth because the cost of acquisition remains the same.  Efforts to drive loyalty need to sustain retention impacts that exceed the investment cost.

In this one simple formula, CX teams should find and pursue business relevance.  Here are some examples to illustrate its application. 

• “Should we improve our return process?”  Zappos has one of the most lenient return processes in any industry, offering no questions asked within 365 days (and sometimes honoring returns from another retailer).  Judged purely on operating cost it makes little sense.  But bring to the CFO the concept that the return policy is an investment to drive repeat business and you have an ROI that will stand on its own.
• “What Average Speed to Answer (ASA) do I need to staff to?”  Many organizations use an 80% of calls answered in 20 seconds as a benchmark.  To determine if this is the right target for your business, review customers answered at different time period and determine their propensity to purchase more products and their retention rate.  You may find that 70% ASA has little to no deterioration in CLV while providing substantial FTE savings. 
• “What’s the value of my new customer onboarding efforts?”  Take a look at the revenue and retention per customer of those who received the onboarding treatments vs the control population who gets no onboarding.  Dig deeper to ensure the design of the program promotes these two CLV elements in a measurable way. 

Don’t get me wrong, I’m passionate about good customer experience and the positive contribution it can make to the business.  But belief  is not enough to convince CFO’s and other key leaders on the value. Worse, belief can be misguided by an overzealous desire to deliver superior service at a cost that does not justify the investment.