Sales volume? Conversion rate? Cost per sale? These are good for efficient use of budget, but they ignore the profit potential of the customer so, you could be wasting your acquisition budget on easy to win, low-value customers and missing better customer opportunities for value-growth;
Sales value? Big ticket sales are good for revenue, but don’t always contribute the most to profit so, can erode your margin;
Retention rate? Some of those customers you are retaining may not be worth the money and effort you put in to saving them so, you could be wasting your retention budget on low-value customers and have nothing left for the ones you really want to keep.
Whilst decisions can be made at the product, channel or service level, this assumes all customers are equally profitable, but each customer consumes and uses products and services in different ways that have differing impacts on your revenues and costs. If you are in business to make profit, then the most important metric for understanding and managing customers should be their expected profitability.
How much positive cash flow a customer could generate provides context to every decision and action to ensure their profitability is maintained or enhanced. Individual customer profitability is typically expressed as the customer’s lifetime value (CLV), which is the net profit attributable to the customer over the duration of their relationship with you.
CLV creates a common currency that helps your business understand which customers are profitable and which are costing you money. Being armed with this information means you can better decide how much to invest in acquiring the right ones and retaining the best ones to ensure a commensurate return on investment. It also encourages better proposition design that is centred on meeting customer needs and enhancing profitability. It also helps you measure the effectiveness of your customer engagement strategies, whether through digital or offline media and across the entire customer relationship.