What is customer lifetime value?

Customer lifetime value (CLV) is a key metric every business should track in order to understand the intrinsic value of the existing customer base.

CLV is a measure of the total value of a customer to a business over the entire duration of their relationship. There will always be uncertainty in this calculation; some customers will be loyal, but others will churn. Estimates of CLV must take this into account.

Machine learning and AI are excellent tools for predicting CLV and can reveal a more granular picture of the customer base.

This approach of calculating CLV on a granular customer-by-customer basis allows Ibex to accurately assess the impact of marketing offers on the long-term income from a customer.

An example

Let’s say an insurance firm is trying to implement a new CRM strategy to maximise the lifetime value of their policyholders using Ibex.

We begin by experimenting. We send various retention communications to the different types of policyholders and observe the short-term impact of these actions. We track who converts and what effect that has on the premiums paid.

Using this data we have collected, we develop deep learning models to predict how likely policyholders are to convert in the future. Combined with a model estimating premiums we can now predict the short-term impact of different offers.

At Ibex, we go a step further. We estimate how short-term revenues will translate onto lifetime value. We consider the two cases after sending a communication:

1. When a customer converts in the short-term

2. When a customer doesn’t convert in the short-term

In each of these cases we predict a lifetime value factor which is a multiple we can apply to our short-term revenue prediction. This fits neatly into our machine learning approach where we predict the short-term impacts of sending marketing recommendations on conversion and revenue.

The graph below visualises the impact on CLV between customers who do convert and customers who don’t convert in the short-term. Customers who convert after being sent a communication are generally more engaged, less likely to churn, and therefore generate greater lifetime value. Customers who don’t convert in the short-term may still convert and generate revenue in the future, however on average this is lower.

Factoring in both the short-term and the long-term impacts into our optimised recommendations allows Ibex to improve both retention and CLV simultaneously.

Why should we consider CLV in marketing?

Knowing the lifetime value of your customers is crucial in making your marketing more intelligent.

Simply tracking short-term conversion rates and profits isn’t enough. Here are two key examples why:

• Reactivation – Churned customers can be difficult to re-engage. In order to bring a customer back, large incentives are often required. These offers may be costly in the short term, but by re-engaging that customer their lifetime value will have increased significantly. Understanding that impact on CLV allows you to determine how aggressive to be with incentives.
• Acquisition – How much you can afford to spend on converting a new customer entirely depends on their expected lifetime value. Factoring this in allows us to determine the most effective incentive for maximising profit.

Understanding a customer’s lifetime value at every stage in their lifecycle allows data-driven decisions to be made meaning marketing resources can be allocated more efficiently.