Ibbaka

View Original

Core Concepts: Customer Lifetime Value (LTV or CLV)

Gregory Ronczewski

By Gregory Ronczewski, Director of Product Design at Ibbaka. See his skill profile.

Definitions

The term Customer Lifetime Value (LTV or CLV) appeared in the 1988 book by Robert Shaw and Merlin Stone titled Database Marketing: Strategy and Implementation. Since then, it has become one of the key metrics used in businesses with recurring revenues to measure the value of a customer. The aggregate customer lifetime value can be used to measure the value of the company.

The standard equation for customer lifetime value is:

Gross LTV = Average Revenue per Customer for Period / Churn Rate for Period

Net LTV = Average Revenue per Customer for Period - Cost to Serve for Period / Churn Rate for Period

It is important to segment the customer base by customer lifetime value and to understand which dimension is driving the overall value.

Focussing in on Revenue and Churn gives the following 2x2 matrix.

Ones goal is to move customers to the top right quadrant. As it is generally eaisest to fix one problem at a time we have not included an arrow from the bottom lef t to top right quadrant.

Once you have a customer in the top right quadrant, it is important to continue to grow the LTV, the arrow within the top sight quadrant.

The key to growing customer lifetime value is to grow value to customer (V2C).

All of the phases of the value cycle can contribute to growing LTV.

The Value Creation and Capture Cycle

To maximize customer lifetime value and drive sustainable growth, businesses must embrace a holistic approach to value management:

  1. Value Creation: Develop products and services that deliver tangible, measurable value to customers. This forms the foundation of your value proposition.

  2. Value Communication: Articulate the value proposition consistently throughout the customer journey. This extends beyond sales and marketing to include customer success teams, who play a crucial role in ongoing value reinforcement.

  3. Value Delivery: Ensure value realization begins with the initial implementation and continues to evolve as customer usage matures over time. Adapt your offerings to meet changing customer needs and expectations.

  4. Value Documentation: Systematically record and quantify the value delivered to customers. This creates a robust evidence base for future interactions and negotiations.

  5. Value Capture: Leverage the documented value to inform pricing strategies and justify price points. This approach contributes to growing customer lifetime value and supports long-term business sustainability.

By orchestrating these elements effectively, companies can create a virtuous cycle of value creation, delivery, and capture. This not only enhances customer satisfaction and loyalty but also drives profitable growth and competitive advantage in the marketplace.

More of Ibbaka’s Core Concepts on Pricing & Value