This week in class we discussed CLV and its importance in the business environment. This type of analysis is pivotal to any business's success but is not as easy to manage as one would think. The initial step in determining the profitability of customers is to have a clear understanding of the activities the targets indulge in. Looking at historical data, demographics, and predicted buying patterns of both new and existing customers allows for the decision makers to segment and allocate necessary resources in the form of communication/promotion to the targeted base.
In the relationship marketing process communication/promotion allocated is dependent upon the preexisting relationship the firm has with the customer, if any. There are five different stages in the life cycle of a customer they are prospects, first-time buyers, early repeat buyers, core customers, and finally core defectors. The expected marketing costs during the customer life cycle are generally negatively correlated. This is to be expected because like any investment the upfront marketing (acquisition) costs incurred in the initial stages of new relationship are larger in the beginning and fade over time.
The strategic implications of CLV involve analysis and calculations to estimate the profitability of a given customer or group of customers. With this information in hand firms can decide whether to "fire", reward, or identify opportunities to cross-sell to their customers. "Firing" customers, or losing a percentage of the least-performing individuals, can provide a firm with a competitive advantage and allow them to retain their highest performing individuals at minimal costs. This can only be achieved with detailed customer information. Rewarding customers on the other hand is looked at as more of an investment in the firm's higher performing customers and can lead to higher loyalty which, in turn, increases the retention rate. Cross-selling looks to increase the profitability of customers through the packaging of products and again can only be utilized to its full potential with detailed customer information.
CLV is pivotal to the success of any business. Evolving customer needs, changing economic and social conditions, and competitors' actions are just a few parameters that can affect the relationship a customer maintains with a firm. The firm that has a framework to optimally deal with these changes is in position for success and CLV analysis and the constant re-evaluation of the listed outside parameters, amongst others, are the key to the castle.