What is a lifetime value

Customer value

The customer value analysis examines how high the discounted excess payment (cash value) is that a customer contributes to the company's success over the entire period of his relationship with the company. Or in the sense of customer value, the customer value indicates the individual utility that the customer attaches to an offer. Loyalty management

The basis for the selection of attractive customer relationships is a causal allocation of costs. The use of process costing is necessary because of the growing proportion of overhead costs in total costs in many areas. Attractive customer relationships are not only characterized by high demand for services with a high profit contribution, but are also designed for the long term (customer loyalty). The sum of the long-term customer relationships has the character of an intangible asset. This knowledge may give rise to relevant impulses when evaluating so-called old and new customers. Characteristic of the approaches available so far is a customer (group) -related representation of sales, full costs and earnings contributions in the sense of an investment calculation. In connection with the acquisition costs and the customer life cycle, the customer value (customer profitability) is determined.

Share of a customer in the success of a company. The value is measured either by its sales volume or its contribution margin (sales minus customer-related costs). With the help of an ABC analysis or a customer portfolio analysis, the customer structure can then be examined with the help of this data. It is more difficult to determine, but just as important are contributions to increasing the company's image (e.g. from reference customers or through recommendations). The measurement of customer value provides an important basis for establishing successful customer loyalty management.

(also customer lifetime value; in €)
In marketing, customer value is called the “lifetime value”, which estimates the profit contribution per customer within the probable duration of a customer relationship. The customer value thus indicates how much contribution margin can be generated over the entire duration of the relationship with a customer.



The customer value approach in its more complex form is a dynamic concept based on the net present value method and used to assess the profitability of business relationships. Future deposits and withdrawals resulting from a customer relationship are forecast, discounted with a discount rate and added up. Based on the resulting net present value, the business relationship with the customer can be assessed in terms of its profitability.
The following graphic illustrates the course of the customer value with the duration of the customer relationship:



The customer value approach is primarily used by companies that have extensive and meaningful customer data (e.g. insurance companies, banks, insurance companies, telecommunications companies and energy providers). From the customer's point of view, these companies have a range of services that is difficult to differentiate from their competitors. Against this background, there is a high level of willingness among customers to change providers. The expenses for acquisition, customer loyalty and customer recovery are correspondingly high. In this context, the customer value analysis should contribute to the economic use of resources and thus to a profitable management of the customer relationship.
example
· A company generates a total contribution margin of
1. € 250,000 and has an average customer base of
2. 500 customers. The average customer retention time is 5 years. This is the average customer value for five years per customer
2. 500 euros resulting from the division of
1. 250,000 euros by the number of
2. 500 customers results. On an annual average, each customer brought the company a contribution margin of € 500 (annual customer value).
According to a study by the Boston Consulting Group, the following average customer values ​​result in different product categories:



· Table 2 shows that in numerous branches only a part of the possible life turnover is realized, i. H. businesses lose significant revenue as a result of customer churn, largely due to their dissatisfaction. The development in the telecommunications sector appears particularly interesting in this context: While this sector was still in a monopoly situation at the time of the investigation, Deutsche Telekom is now affected by violent emigration movements.
· The TARP studies (Technical Assistance Research Program) found that an average consumer means a turnover of € 150,000 for the automotive industry over his entire life. A customer lifetime turnover of € 130,000 was determined for the food retail sector.
· Another example should clarify the calculation method based on the net present value method and thus the more complex approach: A customer buys a small car from a car dealer in January 2008. The sales manager wants to calculate the customer lifetime value of this customer over a horizon of 10 years. To do this, he uses the following excerpt about the “typical” small car customer from the sales department.



The customer value of the customer is
1. 426.10 € and is calculated as follows:
table
4. Scheme for calculating the quantitative customer value (all information except the discount factor in €)



source
The sales of all products after sales deductions required to calculate the contribution margin can be found in the list of totals and balances.
· The determination of the variable costs requires a contribution margin calculation with a separation into variable and fixed costs. In retail, the variable costs can be roughly calculated using an inventory management system.
· If you want to calculate the customer value of individual customers, the customer contribution margin must be determined in the sales department. Here, too, the determination in retail is much easier, as a powerful merchandise management system is able to determine the contribution margins separately for each customer.
· The number of customers and their length of stay can be found in the customer database. Such a database should contain the following basic information, which needs to be supplemented according to company-specific circumstances and the respective analysis purpose:
- Customer status (potential customer, new customer, regular customer, churned customer)
- customer address
- Date of birth (important as a starting point for renewed contact and for tracking down age-specific needs structures)
- Duration of the relationship with the customer
- Time of last contact / purchase
- Communication channel (shop window / exhibition, word of mouth, advertisement, commercial, brochure, direct mail, trade fair contact, yellow pages, Internet, competition)
- In-house contact person (provide a list of departments or employees)
- If applicable, offers, success of the offer, reasons for rejection, orders to main competitors
- For new customers and regular customers: products purchased and time of (last) purchase; Sales volume of the customer (if possible, specify sales size classes); further decision-relevant characteristics of the customer (e.g. price sensitivity, quality awareness)
- In the case of customers who have migrated: Reasons for the migration, migration to which competitors
- If necessary, the customer dwell time must be based on the assessment of experienced employees.
interpretation
The key objectives associated with calculating customer value include:
· Determination of the individual customer value
· Assessment of the individual customer potential
· Deriving individual measures to exploit customer potential
· Optimization of customer relationships to an optimal customer portfolio
The customer value can be used in many ways, as the following two examples show:
· With the help of this key figure, employees can see what a customer is worth to the company and what fatal consequences it has if they leave prematurely due to dissatisfaction.
· A company can use the customer value to calculate the extent to which goodwill should be granted. For example, the question can be answered whether it makes sense to rely on a goodwill arrangement in the amount of
€ 1,000 to be waived if this customer is associated with a value of € 100,000. The case is similar when it comes to whether, and if so, with what financial expense a customer should be won back. After all, it can make perfect sense to part with customers with a low or low customer value and focus the available resources on more lucrative target groups.
Measures to influence
The value of a customer can be increased by three sets of measures:
· Extension of the customer's length of stay by increasing customer satisfaction and / or using economic, legal, technological and social instruments for customer loyalty. These include, among others. the establishment of personal connections, the maintenance of customer clubs, the conclusion of long-term supply contracts, the promotion of customer loyalty through appropriate discount systems and customer cards, the introduction of system concepts (e.g. in IT) and the difficulty of changing supplier through technical precautions (e.g. . by setting standards)
· Increase in sales with the customer by increasing the intensity of use of the products purchased and / or awakening or satisfying additional needs
· Reduction of the variable costs incurred by the customer. For example, customers with a low turnover can switch from personal support by the sales force to telephone sales.
Limits
The calculation of the customer value is based on a consideration of the current situation. This does not take into account the fact that customers can definitely develop from their sales volume. In concrete terms, this means nothing other than that customers who, from today's point of view, have a low customer value, can definitely become more attractive in the future through targeted customer development.
Furthermore, it is extremely difficult to determine the following qualitative customer value factors:
Exploitable up-selling potential of the customer (e.g. development of the customer towards a higher-quality product)
Exhaustible cross-selling potential of the customer (development of the customer towards another product from the range of products)
Function of the customer as a lead customer (= opinion leader in his environment)
· Potential for recommendation (= positive word of mouth in his environment)

Previous technical term: change of customer | Next technical term: customer value, more classic



Report this article to the editors as incorrect & mark it for editing