Use Lifetime Value (CLV) to Guide Your Decision Making

Knowing who your most valuable customers are and prioritizing their business and experience is the key to a healthy, sustainable business. I live in an area that is dependent on tourism for tax revenue and to keep many businesses afloat. Our population grows 3 to 4x during “season,” which largely runs from January through April. Businesses make a disproportionate share of their revenue during these four months and then use that windfall to get them through until the holidays and the next “season,” and maybe to invest a bit in their business. As a local, this can be frustrating when businesses and restaurants cater to the tourists and temporary residents. We are often asked to move or give up our standing table or weekly appointment to accommodate someone else so that the business can maximize its revenue.

This is not a very effective way to run a business. If I spend $100 a week at a local business, I spend $5200 a year with that business. And I have lived here for 6 years now, so I may have spent as much as $30K with that business, not even accounting for future potential revenue streams. There is not a chance that the 4 month “snowbird” or the weekly spring break vacationer spends anywhere near that much with that local business. And yet the small business will often ask us locals to move appointments or endure a lengthy wait for a table to accommodate the seasonal boom in business.

Before you dismiss this as a rant by some entitled person who just wants his table or appointment, consider that this is not just a phenomenon in tourist areas and with small businesses. I used to lead CX for two of the country’s largest rental car companies. For those not familiar with that business, rental car companies make the vast majority of their profits during the summer travel season when families are taking vacations. The companies buy more cars to serve the higher demand and then sell them shortly after Labor Day when demand wanes. The rest of the year is spent serving primarily business travelers who do not pay as much on a per-day basis and typically don’t buy add-ons like insurance and car seats.

We often had conversations about the “last car scenario,” where we had to decide who would get the proverbial last car on the lot if we were short on available cars. Do we give it to the person who reserved the car at $200 per day, but only rents once or twice a year, or to the high-loyalty status businessperson who used their corporate agreement to book the car for $50 a day, but who rents nearly every week? This discussion gets more complicated when you factor in that the businessperson rents all over the country and not at the same location all the time. The location operator is compensated on total revenue and location profitability, so they have a vested interest to maximize revenue by taking the $200 reservation.

But in terms of value to the company, the businessperson that rents 40 times a year at $50 per rental spends $2000 annually to a business, while the person paying $200 only rents 1 to 2 times a year, bringing in a maximum value of $400.

If driving loyalty and future revenue streams is the goal of your business, these are easy decisions to make, but far too many companies maximize short-term revenue by taking a per-transaction view, while having a leaky bucket of higher spending customers who churn because their loyalty to the company is not valued or rewarded. Ensure that you are analyzing your customer feedback and prioritizing your CX improvements based on customer lifetime value. And more importantly, make sure your front-line employees have access to this information and are trained to make their decisions based on who is standing in front of them and the value they bring to the business.