Improving the Customer Experience - Lifetime Value of a Customer

Ed Kless@edkless

“The customer never buys a product. By definition the customer buys the satisfaction of a want. He

buys value.”Peter Drucker

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Calculating Customer Lifetime Value

Where GC is yearly gross contribution per customer, M is the (relevant) retention costs per customer per year, n is the horizon (in years), r is the yearly retention rate, d is the yearly discount rate.

Calculating Simplified Customer Lifetime Value – (No really!)

Where GC is yearly gross contribution per customer, r is the yearly retention rate, d is the yearly discount rate.

Calculating Simplified Customer Lifetime Value – Example

Example: If the gross contribution (profit) of a customer is $500 per year, your retention rate is 95 percent, assume a discount rate of 2 percent (using interest rate as a proxy), this would yield a CLV of $6,786.

So what and who cares?

How Retention Rate Affects CLV

80%

90%

95%

98%

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000

$1,818

$3,750

$6,785

$12,250

Customer Lifetime Value

8

0 1 2 3 4 5 6 7 8 9 10

Not at all likely

Extremely likely

Likelihood of recommending

Detractors Promoters

Passives

What is NPS?

Calculating Net Promoter Score

%P 30% 30%

-0- 45% 35%

%D 25% 35%

NPS 5 (5)

Why this matters!

“An increase in NPS of 5% increases

profits by 25 to 95%.”

Fred ReichheldLoyalty Rules!

Getting Customers on The Grid

• Customer name

• Lifetime Revenue

• Net Promoter Score

• Customer Likeability Score (or other index)

Customer Likeability Score (CLS)

1. Disagree strongly2. Disagree3. Disagree somewhat

4. Agree somewhat5. Agree6. Agree strongly

On a scale of 1-6, please rate your level of agreement with the following statement:

This customer is clearly a joy to work with.

The Grid

C B A

F E DNet Promoter Score

Neutrals (7-8) Promoters (9-10)Detractors (0-6)

Cust

omer

Lik

abili

ty S

core

Dis

like

Like

Customers On The Grid

0 2 4 6 8 100

2

4

6

C B A

F E D

Net Promoter Score

Neutrals PromotersDetractors

Cust

omer

Lik

abili

ty S

core

Dis

like

Like

For more on the Sage Customer Loyalty Program visit:

http://www.sagepartnermarketing.com

Navigate to: Partner Programs >> Partner Advantage >> Customer Loyalty Program

Value Gap

• Basic– Customer name– Revenue from the customer per some discrete period– Value provided to the customer in that same period

• Advanced– Customer name– Value that could be provided over a future discrete period– Possible acceptable price (revenue) for that provided value

Value Gap AnalysisCustomer name Value Provided Revenue The Gap Potential Value Potential Revenue New Gap

Customer 1 1,000 500 500 2,000 1,250 750

Customer 2 - -

Customer 3 - -

Customer 4 - -

Customer 5 - -

Customer 6 - -

Customer 7 - -

Customer 8 - -

Customer 9 - -

Customer 10 - -

Customer 11 - -

Customer 12 - -

Customer 13 - -

Customer 14 - -

Customer 15 - -

Customer 16 - -

Customer 17 - -

Customer 18 - -

Customer 19 - -

Customer 20 - -

Total 1,000 500 500 2,000 1,250.00 750.00