CLV: Customer Lifetime Value

Spend time with Customer Experience (CX) professionals, and you will hear about the challenge to win credibility and support for CX initiatives. While a few enlightened CEOs believe and invest in satisfaction based projects on faith, most CX departments struggle to quantify the ROI of their efforts in a manner needed to compete and win support at the annual budget setting rodeo.

This is because most CX professionals are following directional metrics rather than the hard-core measures that the rest of the business uses to define success. This article attempts to provide a single Customer Lifetime Value equation that captures almost everything CX can do to drive measurable business outcomes. Borrowing from work by Sunil Gupta and basic corporate finance, this article submits the one ROI formula to rule them all and how to use it to define success for your CX initiatives.

There are a lot of metrics that measure customer experience and satisfaction, including NPS, Customer Effort, CSAT, First Call Resolution,…  All good directional metrics to determine general satisfaction. None of them alone, however, will enable a CX professional to quantify a dollar value on a 1% rise in a core business metric like Revenue and EBITDA. 

Worse, because they are directional, it’s very possible to prioritize an improvement area that will increase NPS or CSAT without improving sales or margin. I saw this at American Express when we measured the benefits for overnighting a replacement card. No matter the bump in satisfaction, the economics of sending a replacement card via fedex didn’t drive breakeven revenue except for those spending at a Platinum level. 

So Why Don’t Most CSAT measures work? 

• Subjective: Most customers have a hard time separating the brand, the product, and the service experience. As a result, CSAT scores often blend the entire experience, making it difficult to use them for a specific area.
• Satisfaction Based: Satisfaction is a historical looking measure. Several studies have show it is not a good proxy for loyalty. Customer effort is better, but its still a weak connection.
• Subjunctive: NPS is the worst offender of this loose conjugation. “Would you recommend” is just a hypothesis or sentiment and not directly tied to a business outcome. 
• Scored: Try to ask $1MM for an initiative that gives you a 2% lift in hypothetical NPS when you are up against an initiative that will give you 2% increase in actual paying customers and you will lose every time. As my old Corp Finance professor Roman Israel used to say, “Cash is the King, Queen and Drag Queen of the board room.” 

Don’t get me wrong, I’m not saying CX metrics aren’t useful. What I’m arguing is that they are not enough to win support in the boardroom and budget meetings. Instead, get back to basics with the one equation you need to define, prioritize, and lead CX outside of the office of Chief Customer Hugger. So what is the right measure?

Your Job as a Customer Experience Professional is to

Increase Customer Lifetime Value.

The Customer Lifetime Value Equation

1.      Margin:

Annual Sales Revenue and his ugly brother Service Cost, make up the Margin side of the equation. Take another look at your projects to see if any fall in the golden growth world of the sales department. Your goal here is to increase Sales Revenue while reducing Service Cost. Instead of driving CSAT, you should be looking to drive:

Sales Revenue:

• Purchase Frequency: CX initiatives that increase purchase frequency drive revenue growth.
• Purchase Price: Companies with superior service can charge a higher price or avoid discounting. How can CX contribute to this?
• Cross Sell & UpSell: Use cross and upsell to increase the value of the per customer annual revenue

Servicing Costs: Some products cost more to service than others. Can you move your customers to more self-serve channels? How can you encourage online and mobile behavior to reduce calls to the contact center?

One thing to keep in mind is that the business model impacts how much CX can drive sales improvements, where Peter Kriss shows B2C models are not as linear as B2B.

2.      Retention

Retention is a powerful financial lever for CX professionals and is often a place where they can show early wins. That Retention is so powerful is shown by its exponential position in the CLV equation. Retention is the multiplier by which our annual net revenue per customer accumulates over n years. Changing this number even slightly has a dramatic effect on profitability.  Here are some illustrations of the power of retention:

• The cost of acquiring new customers is up to 5X cost to retain current customers
• 2% increase in customer retention = cutting costs by 10%
• The customer profitability rate tends to increase over the life of a retained customer
• From a competitive position, retained customers do not enrich your competitors

3.      Acquisition Costs

Often overlooked by CX professionals, CX efforts can also help reduce the cost of acquisition efforts. Some highly acclaimed services don’t even need to advertise. 

• New lead generation: Remember Net Promoter Score? Here’s where you make gumption in subjunctive and set up a tangible member get member program.   A healthy MGM program can generate 5%-7% new acquisition leveraging satisfied customers.
• Marketing Costs: Leveraging good customer experience in a set of automated marketing campaigns helps to nurture marketing qualified leads.
• Sales Costs: CX can also reduce the cost to sell a product, especially where good reputation for quality and service leads to a shorter sales cycle.   

Winning the C Suite: Translating you efforts into $ and Sense

Of course CX professionals aren’t trying to improve CSAT metrics just for bragging rights.  But we must continue to uncover and deliver on the double or triple wins. Find areas where CX makes a meaningful impact on a business driver, creating symbiotic improvements on multiple levels. Here are four last tips to using CLV to win C Suite support for your initiatives:

• Start with the primary benefit in mind: Margin, Retention or Acquisition.
• Partner with the metric owner to confirm the project benefits and metrics: 
• Make it Measurable: Build the metrics into the solution. Make sure your key stakeholders buy into the methodology – even if this means employing a test & control structure or reducing scope to a more provable hypothesis. 
• Build the project benefits in to the budget: The more accountable the project is, the more people will want it to succeed, especially those who rely on the results to hit their numbers. 
• Give your Partners the Credit: CX is always going to be a supporting actor to the main sales, marketing, and operations functions. Use your successes to make them look good and you will make long-time allies of CX and supporters for efforts that help the business reach its objectives.