Using CLV to drive business benefits

Five steps to driving business benefits with CLV

Do you believe that Customer Lifetime Value (CLV) is essential to your business, but are not quite sure how to turn CLV into tangible business benefits? You are not alone. The path to successfully driving business benefits with CLV can be broken down into five major steps.

The basic idea of Customer Lifetime Value (often abbreviated as CLV or LTV) is easy enough to grasp: decisions about acquiring and retaining customers should be based on the value generated over the entire duration of the customer relationship.

But once again, the devil is in the detail. There are various alternative methods for calculating the CLV, ranging from overly simplistic to downright painstaking, and many companies are not certain which method to choose. CLV is also sometimes hailed as an oracle that can answer all customer-related questions, but companies are often unclear about which specific business problems they are trying to tackle with CLV. It’s no wonder then that while most companies feel CLV is important, only few have succeeded in using it effectively(1).

The path to using CLV to drive business benefits successfully can be broken down into the following five major steps.

Step 1: Define the objective.

Define the objectiveAs is often the case, the path to success starts with asking the right questions. The key question here is what business benefits are you hoping to drive with CLV? Are you trying to optimize your marketing mix? Differentiate customer service levels? Or perhaps nudge customers toward behavior that fosters loyalty? A clearly defined business objective is the beacon that will guide you through the rest of the process.

Step 2: Choose your CLV metric.

Design your CLV metricOnce you know which business benefits you are hoping to drive, you can design your CLV metric accordingly. You will need to consider factors such as: Should you measure revenue or profit? Should you look at past facts, or try to predict the future? And should you take into account the influence that one customer can have on other prospective and existing customers?

Step 3: Build your CLV metric.

Build your CLV metricNow it’s time to roll up your sleeves get your hands dirty with data. The size and difficulty of the job depends on the CLV metric you have chosen. Fortunately, the first CLV calculations can often be completed as a manual quick-and-dirty exercise, and can be automated later once the business benefits have been proven.

In any case, sooner or later you will probably run into problems with data: some data is not available, or the data quality is not optimal, or recent data is not comparable with historical data etc. It is important not to get bogged down with trying to obtain perfect input data, because there’s no such thing. This is particularly true for CLV, which inherently demands input data over long periods (often several years). Be prepared to make simplifications, estimations and compromises, and keep pressing forward. The trick is matching the data you have to the question you are trying to answer.

Step 4: Validate the business benefits.

Validate the benefitsOnce you have invested the time and effort into calculating you first CLV values, it is time to put them to the test. You must demonstrate that using CLV can generate the kind of business benefits you set out to achieve. If your objective was to optimize the marketing mix, did you find meaningful CLV-differences between marketing campaigns, and how much can you gain by spending your marketing budget more wisely? If your objective was to differentiate customer service levels, is the premium service generating more repeat business from the high-CLV-customers? And if your objective was to nudge customers toward loyalty-fostering behavior, do your interventions indeed reduce churn and/or increase repeat purchases? Whenever possible, consider using A/B-testing for validating the business benefits.

Step 5: Automate, improve and expand.

Automate improve and expandSince you have now proven that CLV can generate tangible benefits for your business, you can go full monty with the implementation. You can automate the CLV calculation process, and integrate the CLV metric into your business processes. This is usually not just a technical exercise, but also an organizational and cultural challenge. For example, you might need to redefine the incentives for your sales reps and/or customer care agents.

As time goes on, you can assess the accuracy of your earlier CLV predictions, and tweak your models accordingly. You can also experiment with other use-cases for utilizing your CLV metric, as long as they are compatible with the way your metric has been constructed.

Stay tuned, there’s more to come!

This is the first in a series of blog posts about harnessing the power of CLV. In the next post, we will dive deeper into the various kinds of business benefits that companies can hope to derive from CLV.

 

(1) According to research by Criteo, 98% of companies believe that CLV is important to their marketing strategy, and 93% are trying to measure it, but only 24% have succeeded in effectively monitoring CLV.

Building blocks of business design

For us, business design is a hybrid approach of two disciplines: top-level management consulting blended together with design tools and thinking. We work on similar issues as any business developer or strategy consultant and do not limit ourselves to strict project types.

Business design is a practice that is only finding its place among its more established peers. Traditional business consultancies that rely on the shoulders of scientific management and hypothesis-based thinking have been around since the 1920s. Similarly the traces of design thinking can be followed to as early as 1960s and cooperative design in Scandinavia.

What then, is business design? We follow David Schmidt’s thoughts and see that business design at its core is the science and art of creating and validating business models. However, we’re not content with that. This definition works in design context when a business designer is complemented with other designers and experts, but we look at business design work within a broader scope.

For us, business design is a hybrid approach from the aforementioned two disciplines: top-level management consulting blended together with design tools and thinking. We work on similar issues as any business developer or strategy consultant and do not limit ourselves to strict project types.

To make this more concrete, we have put together building blocks for successful business design. These are theses that we as business designers believe in and stand for:

Ways of thinking

1. Strategy as actions

First and foremost, to have a major impact business designers need to live and breathe strategy. Simultaneously – as designers – we are doers and see that any strategy has to be realised through concrete actions. Design tradition arms us with tools such as co-creation and experiments to complement conceptual thinking.

2. Understanding change, focus on defense or offense

We look to understand what is changing, and only then decide whether it is time to strengthen the core business or to frantically build new. The increasing speed of change is just another buzzword, if we don’t seek to understand how it really impacts business.

3. Sustainability as core business

We strive to have a real impact in all we do, and marketing stunts – especially when it comes to being sustainable – are not our kind of business. We believe time is ripe for business models that have a positive net impact

4. Holistic, systemic approach

In line with great traditions of design thinking, we scratch deep below the surface; we want to understand the underlying implications and connections. Modern business problems are too large and complex for a single organisation to tackle. Ecosystem views and network models are our day-to-day methods of analysis.

Ways of working

5. Not solution-driven, but problem-driven

We don’t believe in best practices or ready-made solutions, but aim to uncover and understand the problem or issue at hand and only then we take a look outwards: can we get inspiration from some other case or business? We explore what’s possible together with our colleagues from a wide range of disciplines

6. Scalability of everything

There is a growing fear that transformational endeavours don’t scale, create new business or even business value. As business designers we need not only to strive to build scalable services and business models, but also to make business development and implementation scalable.

7. Sustainable business models instead of one-off wins

Buzzwords are not good business. We desire to build business models and services that are lasting and large enough to matter. We investigate and prioritise actions by evaluating business impact in order to make value tangible and support decision making. 

8. Fighting biases and intuitions through being truly customer and data-driven

Leadership and their organisations – even us designers – typically  have ‘proven’ truths or conventions that guide their thinking and actions. We want to challenge this with data-driven insights and decision making, using experimentation and analytics to feed and validate.

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Sometimes we win the lottery. Profitable businesses don’t emerge by accident. Designing them increases the odds significantly.

Our mission is to help you make things happen.

During the coming months we’ll continue sharing our thoughts through a mini blog-series. Feel free to comment, challenge our thinking and have an open discussion with us.

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