Customer Lifetime Value - an avenue to more revenue for start-ups

Akash has a savings account with a bank for long, which he has been using for most of his transactions, including some EMI payments. His new employer has made him open a salary account with a bank where the company has its corporate account. He has created an auto transfer action for 90% of his salary to his earlier account on 5th of every month. If salary is credited on 1st of the month, in effect his 2nd account holds 100% of his salary for 5 days and for rest of the month only 10%. But, on record Akash is an active customer for both his banks.

Nilanjana recently bought a new mobile phone with two SIM slots. She took a 2nd number mainly because the 2nd service provider is offering faster connectivity and better data facilities than what her 1st service provider is giving. So, she reduced the plan for 1st service provider to bare minimum required for making calls and sending SMS only while she took the 2nd service provider’s data plan for meeting all her data needs. She is alive for both the service providers.

Now let us think from the perspective of the 2nd bank and the 1st service provider. Are they generating same or increased value from the customer concerned during the period the customer is staying with their business?

Such phenomenon is very common. For a bootstrap start-up also understanding Customer Lifetime Value has great significance.

Customer lifetime value indicates the total revenue that a business can generate, from a customer, over the lifetime of the customer i.e., till the customer stays with the start-up i.e., during the period the business has relationship with the customer. This is an important metric to know because this helps in determining how much the business should be spending to acquire a new customer.

Customer lifetime value (CLV) is not the same as?customer profitability?(CP). CLV is the present value of the future cash flows attributed to a customer during his/her entire relationship with the business. On the other hand, CP is the difference between the revenues and the costs associated with the customer relationship during a specific timeframe). So, while CLV looks forward CP measures from the past.

Cost of acquisition of new customer is higher than selling to an existing customer. So, retaining and delighting existing network of customers i.e., minimum viable audience have great importance.

A prudent start-up would keep on monitoring?

• which customer is churning and why
• which customer is not churning and why
• who is staying back and why
• who is not staying back and why

The answers to these “whys” would guide while creating customer lifetime value.

Some reasons why CLV is important:

• Customer lifetime value is useful in finding customer segments that are most valuable to the business, understanding their common characteristics and in serving those customers with products or services they value the most. This would lead them in spending more thus resulting in revenue generation for the business.
• The longer the customer stays with the business the more value the customer is likely to bring during that lifecycle and the more revenue the business earns. Since the business can not earn all the revenue from a single interaction, it becomes important to keep the relationship with the consumer alive by creating multiple moments-of-truth.
• Customer lifetime value is driven by relationship management and relationships require staying connected and staying connected with customer again requires creation of multiple moments of truth.
• Optimizing for CLV not only means getting repeat orders from existing customers but also the referrals received from existing customers. In fact, if a start-up can overwhelm its MVA’s wants, dreams, desires and thoughts with its offering, care, attention and focus each of them will help it find 10 more potential customer (or a hundred or a thousand or, perhaps, just three). The referrals generated also contribute towards the customer lifetime value.

There are three approaches to calculate CLV:

Historical:

This approach extrapolates what customers have spent and how often, in the past to make a prediction about the future.

Predictive:

This approach factors in individual customer’s propensity to churn to make a more accurate prediction about future CLV.

Traditional:

Keeping in view that ?customer revenues are not same year on year, this approach factors in changes that happen across the customer lifetime.

To calculate CLV four key items are mainly required:

Average Purchase Value:

Value of all customer purchases over a particular ?timeframe, divided by the number of purchases in that?period

Average Purchase Frequency:

Obtained by dividing the number of purchases in that same time period by the number of individual customers who made a transaction over the same period

Average Customer Lifespan:

Average length of time a customer continues to buy from the business

Churn rate:

Rate at which customers stop purchasing from the business

As for example, in a given month if a business has four cancellations out of 100 customers then the churn rate is 4%. So knowing that the business is losing 4% of its customers every month tells that the average customer is going to stay with the business for approximately 1divided by 4% i.e., 25 months. The churn rate information would help in arriving at the CLV.

If the CLV is INR 1500 and if the cost of acquisition of a customer is INR 2000, then that would indicate that the business is spending too much to acquire customers or maybe the price is too low or maybe there are other factors that the business needs to adjust.

Now, I will talk about customer centricity of a start-up. Let’s take the case of Practo, an Indian start-up. It has a patient-focused website which currently has more than 100,000 doctor profiles from across India and Singapore.? Practo started with a simple application for making doctor appointments 24x7 for patients. In-clinic and video consultations were available.

They kept on studying what doctors needed. They observed that doctors, especially dentists, use a number of materials and tools that they have to carry. Managing such inventories has been troublesome for the doctors. Practo found a need gap. They introduced inventory management software onto the Practo platform. Loyalty and CLV of doctors increased.

Do not think in terms of product or service only. Think in terms of platform. That would give more avenues for value generation.

Then Practo observed that small nursing homes (10-15 bed), which are mostly run by surgeons, carry a lot inventories. Again they plugged in an inventory management system for such places. Traction of doctors increased manifold.

Later they realized that doctors face problems in keeping their books of accounts. So, they put in place an account management module on their platform.

Now that the doctors are connected on their platform, other market players whose businesses are connected with doctors (like pharmaceutical companies, pharmacies, Test labs and health insurers) started promoting their products or services through Practo to the doctors as well as to patients.

Practo first created a loyal customer base, a minimum viable audience. Gradually, they gave channels to other players to reach that market segment. They identified who are the most valuable customers for them and what Practo can do to enhance their value extract and find more customers like them. They built relationships with customers to build the business.

It’s an interesting business model example of how customer centricity and intelligent management of customer lifetime value can help in creating more avenues for generating greater revenue.

Monitoring and ensuring Customer Lifetime Value from the very beginning thus can show the path to greater value generation not only for a start-up but also for its stakeholders.

Do not think in terms of product or service only. Think in terms of platform. That would give more avenues for value generation.

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I am an Entrepreneurship Educator and Startup Mentor.

You can follow me at: www.dhirubhai.net/in/debasish-bhattacharyya-mentor-enabler-strategy-innovation

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