149H
ow do managers decide which cus-
tomers offer the highest profit poten-
tial? Should marketing programs focus on
new customer acquisitions? Or is it better
to increase repeat purchases by existing
customers or to implement programs
aimed at specific target markets? Time-value-of-money calculations can be a key part of such
decisions. A technique called lifetime customer valuation (LCV)calculates the value today (pre-
sent value) of profits that new or existing customers are expected to generate in the future. After
comparing the cost to acquire or retain customers to the profit stream from those customers,
managers have the information they need to allocate marketing expenditures accordingly.
In most cases, existing customers warrant the greatest investment. Research shows that
increasing customer retention 5 percent raised the value of the average customer from 25 per-
cent to 95 percent, depending on the industry.
Many dot-com retailers ignored this important finding as they rushed to get to the Web first.
As new companies, they had to spend to attract customers. But in the frenzy of the moment, they
didn’t monitor costs and compare those costs to sales. Their high customer acquisition costs often
exceeded what customers spent at the e-tailers’ Web sites—and the result was often bankruptcy.
Business-to-business (B2B) companies are now joining consumer product companies like
Lexus Motorsand credit card issuer MBNAin using LCV. The technique has been updated to
include intangible factors, such as outsourcing potential and partnership quality. Even though
intangible factors complicate the methodology, the underlying principle is the same: Identify the
most profitable clients and allocate more resources to them. “It actually makes a lot of sense,”
says Bob Lento, senior vice president of sales at Convergys,a customer service and billing ser-
vices provider. Which is more valuable and deserves more of the firm’s resources—a company
with whom Convergys does $20 million in business each year, with no expectation of growing that
business, or one with current business of $10 million that might develop into a $100-million client?
Convergys’s management instituted an LCV program several years ago to answer this question.
After engaging in a trial-and-error process to refine its formula, Convergys chose to include tradi-
tional LCV items such as repeat business and whether the customer bases purchasing decisions
solely on cost. Then it factors in such intangibles as the level within the customer company of a
salesperson’s contact (higher is better) and whether the customer perceives Convergys as a
strategic partner or a commodity service provider (strategic is better).
Thanks to LCV, Convergys’s Customer Management Group increased its operating income
by winning new business from old customers. The firm’s CFO, Steve Rolls, believes in LCV. “This
long-term view of customers gives us a much better picture of what we’re going after,” he says.LCV
ITALLSTARTS
WITHTIME(VALUE)