Customer value: How much are your customers worth to your company?
Every customer has a value for your company. This is the contribution of individual customers that brings you one step closer to achieving your company's goal. Loyal customers are crucial for high customer value.
What is customer value?
Customer value is probably one of the most important key figures for a company, if not the most important key figure. It provides information on whether and to what extent a customer contributes to the achievement of your company's goals. It forms the basis for targeted marketing and long-term corporate success.
Definition of customer value
By definition, customer value - or "customer lifetime value" - is simply the monetary value that your customers - or the individual customer groups or individual customers - spend with your company over the course of their "customer lifetime". In short, it is the revenue that your customers generate for you over a certain period of time.
Why is customer value important?
The foundation for successful long-term customer relationships is customer centricity and orientation. You have to focus on the needs of your customers. As soon as you start thinking about your customers' needs, you will quickly realize that there is no one need or problem that you can solve for all customers.
That's why there are target groups and buyer personas in marketing. They are a group of customers who behave similarly and have similar needs. Customer orientation and customer loyalty require time and resources, which is why you should focus on the customers who are most valuable to you.
And that's where customer value comes in. Customer value helps you to find out which customers are worth investing more in marketing and service. It is the prerequisite for targeted marketing and helps you optimize your spending and resources.
How do I increase customer value?
The customer value is made up of the expenditure and income associated with a customer. So these are the two levers at your disposal. Reduce expenditure while keeping income constant. Increase income while expenses remain the same. Or higher expenditure with disproportionately higher income (or conversely, lower expenditure with disproportionately lower income).
However you put it, at the end of the day it's all about the so-called "payment surplus" - your customers bring more value to your company as part of the customer relationship than the company has to spend on it.
From experience, we can say that it's worth investing in your most valuable customers. Because these are the customers who are loyal to you and come back to you again and again - the so-called A-customers or, in other words, the most loyal and profitable part of your regular customer base. And what does that require? Of course, effective customer loyalty!
This is where the circle closes again. If you put your customers at the center of all customer relationship management tasks and activities and act in a customer-oriented manner, customer satisfaction will increase.
And what do satisfied customers do? They are loyal and remain loyal to you. They will also tell their friends about you and help you acquire new customers along the way.
What about customer data?
A prerequisite for targeted customer orientation is that you know your customers. Get feedback to quickly uncover potential problems. Analyze your customers' purchasing behavior and try to understand how they make decisions. Collect as much customer data as possible.
Through this feedback and the targeted collection and use of customer data, you can develop various metrics and then perform customer segmentation: We refer to this as ABC analysis: your customer base is divided into so-called A customers, B customers and C customers based on customer lifetime value. More on this later in this article.
Targeted communication
If you know what makes your customers tick, you can use this information to personalize your marketing activities, especially communication. Use channels that your customers are actually on.
We have had particularly good experiences with push messages. If you communicate real added value in just a few words and send it directly to the most important medium in today's society, the smartphone, then this message will actually get through. Of course, this requires a dedicated app.
However, developments in recent years have shown that an app has become a central component of the marketing strategy for more and more companies, especially in sectors such as retail, gastronomy and services. Digital customer loyalty via app has long since ceased to be an insider tip and is increasingly becoming a prerequisite for good customer value. And also for the particularly effective push messages.
Use of a bonus program
Another best practice that has proven itself in practice is special offers and rewards for loyal customers. With a loyalty program, your customers can collect loyalty points and redeem them for attractive rewards or offers at your company. They are happy to save some money and will choose your company over the competition when making purchases.
A loyalty program, especially collecting points, also has a psychological effect on sales. People have always been collectors and the more points they collect in a loyalty program, the stronger the lock-in effect and fear of loss.
How do I calculate the customer value?
There are numerous methods for determining customer value. You need to determine which of the indicators are most important for your company and which will bring you the most benefits when segmenting your customers. The goal is the same for all of them: the investment in your customers should be in balance with their profit potential. We have put together a brief overview for you here.
Customer Lifetime Value (CLV)
The customer lifetime value (= cumulative value of the individual customer relationship) looks at the customer lifetime from a purely economic perspective. The focus here is solely on the profitability of your customers: what capital value have they brought to your company in a defined period of the business relationship?
The somewhat more complex calculation also includes predictions about the customer's future purchases. In contrast to the ABC and RFM analysis, this not only "looks back" into the past, but also into the future. Furthermore, the expenses for the customer and a discounting of the capital must be taken into account.
Customer Lifetime Value: ABC customer value analysis
In the ABC analysis, customers are also mainly clustered according to monetary aspects such as sales, costs and contribution margins. Grouping the customer base into A, B and C customers allows your company to focus on the essentials and profitably deploy the available capacities where they bring the greatest benefits.
The Pareto principle is probably the best-known business management tool, dating back to the 1950s. The 20% of your customer base that generate 80% of your turnover are your Group A, which should be your main focus. The 20% with the lowest turnover form your customer group C. All other customers are therefore your group B.
So you can see that you can easily distinguish the customers with the highest purchasing power from the most cost-intensive customers with little effort.
But be careful: the disadvantage here is the focus on the past. For meaningful planning, however, softer factors and potentials should also be taken into account - which allow you to look into the future, e.g. with regard to cross-selling potential.
Customer Lifetime Value: RFM customer value analysis
The RFM analysis relies on behavior-based characteristics that can be used to segment the customer base in order to determine which groups are particularly profitable for the company in terms of value and which are not.
The segmentation is based on the following criteria
R = Recency
F = Frequency
M = Monetary Value/Sales
However, another disadvantage of this method is that it does not allow any meaningful forecast or calculation for the future. It is therefore not very suitable for planning marketing strategies.
KPIs: Scoring models
The scoring model takes into account not only quantitative aspects of customer interaction with your business, but also qualitative aspects, similar to a customer portfolio analysis. As this is a multidimensional model, both monetary and non-monetary indicators are taken into account, allowing for a detailed customer evaluation.
Complex and extensive statistical procedures can be used to make assumptions about the probability of a purchase, assumed sales or the tendency towards certain products and services. The probability of a certain customer group being receptive to cross-selling offers can also be taken into account.
To do this, a criteria catalog with a maximum of 10 variables is first created, which your company determines itself and then weights. These criteria can then be used to evaluate the customers in your customer base, resulting in a ranking of the importance of your customers.
The disadvantage of this model, in addition to the high individuality of the evaluation criteria and the associated limited significance for the customer life cycle, is also the considerable amount of data that is processed here. A customer value analysis with the scoring model is therefore primarily suitable for you if your business has a small customer base. If the customer base is too large or there is too much data available, the tools required will quickly exceed the possibly small marketing budget - which ultimately does not help customer satisfaction.
Client portfolio: The famous "Boston Consulting Matrix"
The customer portfolio approach originally comes from the financial sector. Here too, non-monetary as well as monetary criteria are included in the analysis. Since more aspects are included here, you also get a more detailed evaluation - in contrast to the conventional ABC analysis.
Your regular customers are divided into a four-field matrix. The two axes of the matrix describe the turnover (the monetary value) and the potential (the qualitative value) of a customer. The resulting fields divide the customers into four types:
1. strong customers (the "stars", so to speak)
Your company should focus on these customers in particular. They generate the highest contribution margins and have the longest customer loyalty.
2. development customers (the "question marks", so to speak)
These customers are at the very beginning of the customer relationship with your company. They show great potential, but still need to be convinced not to switch to the competition. More suitable products or services are needed here to successfully retain them and establish the customer relationship in the long term.
3. revenue customers (the "cash cows", so to speak)
The focus here is on increasing profits and reducing customer-specific costs. These customers are of no interest to your company or your competitors. Efforts should rather be invested in acquiring new customers.
4. abandonment/problem customers (the "poor dogs", so to speak)
These customers have not yet been encouraged to become more loyal to your company - regardless of their efforts - and have no interest in doing so. This is where you should invest the least or no effort at all - customer satisfaction is difficult or impossible to achieve here.
Customer lifetime value as a central element of your marketing mix
Customer lifetime value (CLV) is the basis for effective marketing and successful resource planning for every company in the context of targeted customer relationship management.
But don't worry if you've been less focused on your customer value so far. If you start now and get to know your customers better step by step, concentrate on their needs and focus on particularly valuable customers, you will quickly see the first successes. Your customer value will increase and you and your customers will benefit - for example with more cross-selling and thus higher sales. A real win-win situation.
