Lifetime customer value (LCV) is an idea that each customer should be analyzed in terms of current and future profitability to a brand. When a profit figure can be assigned to each customer, the marketing manager can then decide which customers to target.
The past profit that a customer has produced for the brand is the sum of the margins of all the products purchased over time less the cost of reaching that customer. This is feasible for firms which maintain their customer data like e-commerce firms and businesses selling products & services in an organized retail set-up. For other firms, there is dearth of customer data like businesses having unorganized selling channels (for eg. Kirana stores, pharmacies) and firms which have products which do not come with any warranty and hence no customer data is gathered for providing post-purchase service (for eg. Building material, paint & hardware etc.). For such businesses, a consumer panel can be built by considering a sample of consumers from all types of important markets. Frequently reaching out to this panel will generate awareness around consumer’s present consumption basket.
With respect to future profitability from a customer, consumer surveys can be conducted to know about their changing consumption baskets. LCV is calculated by adding forecasts for the major parameters which obviously requires assumptions about future purchasing, product and marketing costs, as well as brand loyalty, that is, how long the customer can be expected to remain with the brand. Generally, this will result in a number of scenarios for each customer depending upon these assumptions and hence would provide cues to build relevant product & marketing strategies to generate more profit out of these customers.
The LCV formula can also be used to show where additional profits can be obtained from customers by either cross-selling or up-selling. For example, marketers are interested in what products are often purchased together, often referred to as market basket analysis. Complementary products can then be displayed on the same physical page in a brochure/catalogue or on a website.
Given the construction and analysis of the customer information contained in the database, the next step is to consider which customers to target with the firm's marketing programs. The results from the analysis can be of various types. If segmentation-type analysis is performed on purchasing or related behavior, the customers in the most desired segments (e.g., highest purchasing rates, greatest brand loyally) would normally be selected first for retention programs.
Other segments can also be chosen depending upon additional factors. For example, for promotions or other purchase-inducing tactical decisions, if the customers in the heaviest purchasing segment already buy at a good rate, that implies further purchasing is unlikely, a second-tier with more potential would also be attractive.
If individual customer-based profitability is also available through LCV or similar analysis, it would seem to be a simple task to determine on which customers to focus. The marketing manager can use a number of criteria such as simply choosing those customers which are profitable (or projected to be) or imposing an ROI hurdle. The goal is to use the customer profitability analysis to separate customers that will provide the most long-term profits from those that are currently hurting profits. This allows the manager to let go customers that are too costly to serve relative to the revenues being produced.