Basic Marketing Concepts Demystified! – Part Six: Customer Lifecycle Management

Customer Lifecycle Management, (also called CLM) is the measurement of different customer metrics, with the goal of helping long-term organization performance. While traditionally practiced by businesses, the same principles can be used by non-profits, government agencies, or any group that seeks to serve a large group of people over an extended time.

CLM shares some conceptual overlap with Customer Relationship Management (CRM). The most important difference between the two is that CLM always factors in time.

Parts of the customer lifecycle:

Acquisition – When someone first becomes a customer.

Service – When goods are exchanged.

Retention - When a customer comes back for another transaction.

And that’s all you really need to start with!

To make sense, CLM has to be practiced by everyone in a company, with special emphasis on frontliners in sales and marketing. CLM involves knowledge of how customers arrive at decision, in which case, an idea of the sales/decision funnel and sales process is needed. Customer acquisition, retention, cross and up-selling, and lapsed customer win-back are some of the major ideas encountered in most CLM frameworks .

Some detailed CLM models also include provisions for:

acquisition
introduction to products
profiling of customers
growth of customer base
cultivation of loyalty among customers
termination of customer relationship

Regardless of your Customer lifetime management program, it’s important to understand two basic concepts- the customer buying window, and customer lifetime value. They are exactly what they sound like, and an idea of both is needed in any meaningful CLM approach.

The Customer Buying Window

The “buying window” or “purchase window” refers to a period of time where:

A product or service is available

A product will be available in the forseeable future.

Customers have already made the decision to purchase that product/service.

BEFORE a purchase or exchange is made.

Key concepts:

The purchase window is at the “action” stage of the purchase funnel, or approaching it.

It does not necessarily mean that they have decided to buy your product in particular. If there is no differentiation between your product and others (as in the case of most staples) availability, functionality and low cost will often be the deciding factor. For instance, not many people have a particular favorite paperclip brand.

As soon as the decision has been made, it’s a marketer’s job is to make it as simple as possible for customers to get what they already want. Reduce the number of steps they must go through before they could make a purchase. Make sure not to confuse them with extraneous options.

Customer buying windows are extremely variable. It can take mere moments for impulse purchases, or years as is common with some government or corporate purchases.

Different marketing channels and products motivate in different ways .

You control product availability. A product with a perception of exclusivity can be marketed and sold differently than one without.

Frontliners in your sales and marketing teams are especially crucial in any CLM framework.

Customer Lifetime Value

Customer lifetime value (CLV) (or CLTV), lifetime customer value (LCV), or user lifetime value (ULTV) or lifetime value (LTV) is a prediction of revenue and sometimes intangible value a customer gives over the course of their relationship with a seller/provider.

The idea that customers should be valued over entirety of their interactions with a buyer instead of on every sale is the reason for having Customer lifecycle management programs in the first place.

CLV should not be confused with customer profitability which is a purely historical view, without future projections.

Reasons for tracking customer lifetime value:

To determine differences between different kinds of customers

To allow better allocation of resources according to types of customers, especially for promotions and retention programs

To provide a better idea of how CRM programs are running

To give an accurate idea of customer acquisitions costs and how to reduce them

Gives business managers a long-term view of customer behavior, necessary for stable growth

There are no real disadvantages at all for tracking customer lifetime value. Problems only arise when data is misinterpreted or if market conditions are not well understood. It’s also possible to create unacceptably inaccurate models by using the wrong inputs.

There are several ways of calculating lifetime value. It isn’t generally feasible to create accurate models for every possible combination of product, customer, and future outcomes.

Some ways of calculating CLV:

Where $\text{GC}$ is yearly gross contribution per customer, $\text{M}$ is retention costs per customer per year, is the horizon in years, is the yearly retention rate, is the yearly discount rate.

$\text{CLV} = \text{GC} \cdot \sum_{i=0}^n \frac{r^i}{(1+d)^i} - \text{M} \cdot \sum_{i=1}^n \frac{r^{i-1}}{(1+d)^{i-0.5}}$

One of the more popular simplified versions:

Assume constants for contribution margin, retention rate, and discount rates.

$\text{CLV} = \text{GC} \cdot (\frac{1+d}{1+d-r})$

And others:

CLV = Margin ($) * (Retention Rate (%) ÷ [1 + Discount Rate (%) - Retention Rate (%)])

CLV = (Average Value of a Sale) *(Number of Repeat Transactions)*(Average Retention Time in Months or Years for a Typical Customer)

CLV = (Avg Monthly Revenue per Customer * Gross Margin per Customer) ÷ Monthly Churn Rate

CLV = (latest month’s Average Order Value) * ( [lifetime AOV] / [AOV]) * (Gross Margin)

Popular inputs:

Churn rate
Retention rate
Discount rate
Interest rate
Inflation rate
Contribution margin
Gross Contribution
Retention cost
Period

Why so many formulas?

The Marketing Accountability Standards Board does not officially endorse any method for calculating customer lifetime value for many good reasons.

CLV — and therefore CLM— is dynamic, and completely dependent on the current marketing conditions

Different goods have different intrinsic qualities – making it hard to use just one formula for multiple products and services.

Different CLM and CRM programs may require different outputs and degrees of accuracy.

CLV should not be the sole factor for making decisions on marketing strategy for the following reasons.

Intangible values and differences in demographic behavior are difficult to include as inputs
Serving only “high-value” customers might lead marketing strategists to neglect opportunities to convert other customers.
The risk of saturating high-value customer is high (they cannot buy an infinite number of cars, donuts, etc)
The nature of product-customer-seller relationships is often difficult, if not impossible to accurately predict.

Customer lifecycle management is a major but crucial undertaking for any business that hopes to serve a any market for an extended time. While CLM programs clearly require frontliners with good customer service chops, they also require analytical mindset and plenty of strategic forethought. Developing quality products as well as identifying new ways to delight customers will also require including production, quality assurance,

It’s not just something you leave to marketers and salespeople, but something nearly everyone in any business has to be involved with.

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