For a while now, I've been interested in Customer Lifetime Value and I've put this blog post together to give you an idea of how I see CLTV in the new omni-digital world.
You see, for years companies have been using CLTV to manage customer segments. For those who are uncertain about how CLTV works, essentially it's the process by which you take the total amount of revenue a customer is going to give your company, subtract the total cost to serve that customer, multiply that by the lifetime of the relationship and wham - if it's positive, you're good to go, if it's negative, you choose how to grow the value, or how to distance yourself from the customer/segment.
It's a pretty straight-forward calculation, and it looks like this:
Where,
m is the average gross margin
i is the discount rate (or cost of capital)
r is the customer retention rate
I propose companies look at CLTV in a different light. I believe that if a company is going to manage by CLTV, it should have an eye to levels of influence among its customers.
Here's the way I break it down:
CLTV (the old way of calculating lifetime value)
AI (the ability to influence your social network in a %)
SN (the number of people in your social network)
UI (the universal probability that people who are influenced will act, also %)
Such that, my new social-media influenced CLTV equation that looks like this:
New CLTV = CLTV + {[CLTV x AI x SN] x UI}
So you're going to ask - how does this change matters? Before I answer, I'd like you to watch this video: (http://vimeo.com/10104695)
New Era 59fifty Customer Interview from 80/20 Solutions Inc. on Vimeo.
So, here we have a kid who buys $1500 worth of ball caps. We could assume that his value to the company is $1500 and be done with it. He's a profitable customer, no doubt, but I argue that 59fifty should treat him a little bit differently based on his ability to influence others.
Assume, he had an ability to influence at 80%. And that he had 20 people in his social network. Also, and I'll just take a stab at it (I'm sure you could find loads of psychological probabilities out there), but let's say the ability of a boy 12-18 years of age is 95%. And if you wanted to go further, you could also include the # of 12-18 year-olds turn 19, so that you have more accuracy.
The equation looks, then, like this:
New CLTV = $1500 + {[$1500 x 80% x 20] x 95%}
The NCLTV would be $24,300.
With today's marketing tools (e-mail, sms, mobile, etc.) it is very easy for companies to segment their customer database a million different ways. I suggest that companies who use CLTV to understand how technology and social media have changed the landscape and made it easier for companies to attribute values to different members of their database.
Thoughts?
