“Is this Ms. Margrett Oran?” the caller asked, with an accent that I placed somewhere in Southeast Asia.
“Yes it is”
“Thank you for taking my call ma’am.”
Uh oh, I thought, I have been caught by a telemarketer.
He identified my bank and added: “I am calling about your business account.”
So, what’s he going to sell me now – another credit card? I already have more than enough credit. I should never have taken the call.
“I have been noticing that you have been doing a lot of transactions lately on this account. Remember this account allows 5 free transactions each month. After that you pay for each transaction.”
I stopped scrolling through Facebook and focused on what he was saying.
“Here’s what I suggest – you could upgrade your account or …”
I knew it! Here comes the sell …
“Or you could wait and do all your transfers at one time at the end of the month.”
I thanked him, pointing out that I had not noticed the additional charges, and had forgotten about the 5-transaction limit.
“Yes ma’am. We wouldn’t want you paying more than you have to. We want you to save money. Have a good evening.”
I sat wondering why a bank would call to tell me how I can reduce the fees I pay, for my transaction expenses are their revenue. How could this be a sustainable business strategy?
Customer Lifetime Value (CLV) measures the profitability of a customer over his/her entire lifetime. A business that tracks CLV is less concerned with eking out every cent of revenue and profitability in each transaction, and more focused on building satisfying relationships with customers that last their entire lifetime. There are very complex formulae to calculate CLV, but most are rooted in this simple formula:
- Average revenue from a sale/transaction
- Multiplied by the number of repeat transactions per month or year
- Multiplied by the number of months or years you expect your typical customer to remain your customer
Track the number over time to determine trends, set targets and monitor the performance of your team. One can also calculate CLV for each customer segment e.g. geographic location and demographics such as age, profession or lifestyle. This metric will provide insight such as which customers are most profitable for the business – is it the one who does a large transaction once, or the one who stays for 10 or 15 years with small monthly transactions? We tend to focus on the large transaction and neglect the “slow and steady” tortoise customer, not recognizing that over time, the latter may be profitable. Indeed, many businesses fixate on the first 2 elements of the formula i.e. the average transaction value and the number of transactions, but developing strategies to increase the customer’s lifetime, extending it by even a few months or years, can have a massive impact on profitability. This approach increases revenue whilst also reducing the cost of customer acquisition as it’s less costly to keep a customer than to get a new one.
Doing this analysis provides crucial information to answer this question: “How can we maximize the lifetime value of each customer?” But I think a better question is: “How can we maximize the lifetime value TO each customer?”This takes us out of the realm of a transactional type of relationship, to one where our prime focus is on providing as much value to our customer for as long as possible.
I don’t know what the strategy of my bank is, but my conversation with their representative suggests that they are focused on extending the years that I remain a customer. I have been their customer since I moved to Canada, and frankly, I see no reason to switch.
