Customer Lifetime Value and CRM

How can I use a CRM system to keep an eye on customer lifetime value and use it to optimize profits?



The Customer Lifetime Value, CLV in short, is also called customer value. However, the CLV is generally understood as the average value that a customer has during his entire “customer life” and which he will still have for the company. The term originates from business economics and consists of two parts. On the one hand the current customer value and on the other hand the potential future customer value. Through intelligent customer relationship management solutions, long-term client relationships are maintained profitably and thus lucrative CLVs are generated.



Why should companies want to calculate the CLV at all?

Customer-Lifetime-Value

Marketing strategies have to be planned to be successful. Customer management is expensive and individual measures have to be individually adapted to the client. If your customer reaches a high customer lifetime value due to his previous history, higher budgets can be released without great risk. However, if the CLV is quite low, the total effort required for profitable support is kept rather low.


Invest time in customers who bring money!


Thanks to modern customer relationship management solutions, you always keep the overview and invest twice right!



How to calculate the CLV?

CLV

The formula for calculating the CLV is: CLV = sum T at time T0 * (eT – aT/ (1 + i)*T)

T is the duration of the business relationship. eT is the expected payments of an individual customer. aT is the costs incurred for customer care and i is the calculation interest rate that takes the duration of the entire customer relationship as the calculation variable. Usually average values are used for the calculation and, if necessary, further factors such as socio-demographic aspects (income, social environment, country of origin, etc.) are taken into account.

Don’t panic, please! This is only dry theory, which a system like SugarCRM calculates for you at any time at the blink of an eye.


But now a simple example of the above theory:

Customer-Lifetime-Value


For example, if a customer of an electronics store buys equipment worth 300 euros per year over five years, his CLV is 1,500 euros.

This calculation turns out to be somewhat more complex when it comes to making statements about future purchases. At the same time, to calculate the CLV correctly, it is also necessary to take into account the customer’s expenses and the discounting of the capital.




What’s the catch?

CLV

The customer lifetime value is an important key figure in business management. In practice, however, this concept can reach its limits. This is especially true for forecasts. For example, it is not easy for companies to predict whether a customer will stay or leave. On this basis, no valid statements can be made about the value this customer will have for the company in the future. Basically, the more comprehensive the customer’s history, the more accurate the values for CLV forecasts. If a customer has already purchased many products from a company or retailer, it is easier to determine on this basis how its value will develop in the future compared to a new client.



CLV is generally a very important parameter. Unfortunately, this concept also has its limits. Everyone would like to be able to predict whether a customer will stay or leave and if the new marketing strategy will bring the desired success. There is no value for calculating these events. But thanks to your customer relationship management system, there is a detailed customer history. And the more comprehensive this history is, the easier it is to determine which customer value this buyer will still have for your company on the basis of the scores.



But it would be best if you convince yourself of the many advantages.

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