Friday, March 25, 2011

Is There a Better Measure for Customer Value?

The Customer Institute has long believed that one of the better measures of a customer is the customer's Lifetime Value (often referred to as the CLV - Customer Lifetime Value). Now a group of professors has offered an alternative to CLV which they refer to Customer Equity (CE).

They pose the argument that CLV focuses only on existing customers and ignores the notion that companies often have a significant number of potential customers that will ultimately be acquired and produce cash and add value to the company. The CLV argument is that CLV represents the upper bound of what a company should be willing to spend to acquire a new customer. Thus, the CLV argument looks at one customer at a time and ignores potential customers.

There is a strong argument, that potential customers also have value; otherwise, why chase them. While companies often say they want loyal customers, and they really do, those same companies will spend most of their marketing money trying to capture new customers. If that is the case, then a model that attempts to capture those potential customers into its measure of customer value has a valid point from our perspective.

The CLV model is particularly appropriate for evaluating individual customers and can compute the total customer value based on the individual customers in the customer base. By continuously monitoring this LTV companies can detect trends in their long term customer value (which may be particularly important if the company is looking to be acquired).

The use of the customer equity model brings the future into the perspective of the value of the customer base. Of course, the concern would be how does one decide when a potential customer should be included into the calculation. There are many who would argue that such an inclusion could lead to erroneous assumptions of which to include and may end up leading to a complete distortion of who the real potential customers are and their value to the company.

While the CLV method brings a measureable quantity that can be reproduced, it certainly undervalues the customer base by excluding those potential customers. On the other hand, customer equity brings a higher value to the customer base but includes some assumptions that may ultimately be misleading.

The bottom line is there needs to be further clarification of what characterizes a potential customer that is unambiguous and repeatable. It will be interesting to watch how these metrics evolve and which one will ultimately dominate.


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Javis Lounsbury said...

By evaluating every customer, long-time or new ones, you can find more ways in improving your service that will cater their needs. Though it may look difficult, the benefit it brings to you and your company will be extraordinary!

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