CLV and CRM: Ingredients for Success

Customer lifetime value is a very important tool to analyze which customers to invest in and acquire. While it is helpful for determining the financial consequences of different decisions, there are challenges associated with this measure. It can be difficult to determine some of the factors included in the calculation. For example, a lot of data is required to obtain retention rates, acquisition costs, and response rates used in the equation. Furthermore, as discussed in class, a portion of this value is consumer valuation and their perception on the firm. This value is hard to obtain and subjective. Since so much data is necessary, CLV may be timely and/or costly. However, I believe the information it provides is very useful and important for firms.

Playing around with the Harvard Business School CLV problem, I found it interesting to see how each input influences the total CLV. For instance, through analyzing the graph which compares profit per customer versus present value over 6 years, I can see the affect of each input. All other factors equal, changing the average number of purchases from 3 to 6 increases the maximum profit per customer, but maintains each line's slope. However, increasing average retention rate from 60% to 75% has no effect on maximum customer profitability by increases the PV of each customer. Hence, depending on a company’s objectives, it can use various marketing tactics to enhance CLV through understanding its consumers.

Also, I especially enjoyed Fred Vogelstein’s article, “Great Wall of Facebook: The Social Network’s Plan to Dominate the Internet – and Keep Google Out.” I was very surprised by the amount of information the company is able to collect from its users. Facebook is a great example of a company that constructed a business model which makes users want to share their data. One factor I believe has led to Facebook’s success is the importance it places on its users. When the company changed its terms of service, giving itself ownership of anything someone posted to the sight, many were extremely upset, and petitioned. Facebook answered this negative response by reversing the changes. Clearly the company understands the significance of its users’ satisfaction, and caters to them appropriately. Understanding the demands of its clients has played a huge factor in Facebook’s success.