June 10, 2011 | Authored by: Vindicia Team
Launching A Digital Business – Customer Lifetime Value
Launching a digital business is complicated, but when done right, can yield great rewards. Online services are increasingly the dominant channel to inform, educate, entertain, and even protect consumers.
This digital explosion has spawned new sectors, business models, and successes, as recent IPO filings may indicate. Our clients and prospects often inquire about how to best expand and manage their digital businesses, so I thought it would be beneficial to highlight three key topics every digital merchant should consider: Customer Lifetime Value (CLV), global expansion, and Payment Card Industry (PCI) compliance.
What is Customer Lifetime Value (CLV) – and why should digital merchants care about it?
CLV measures the net present value of the cash flows attributable to an individual customer or potentially the customer segment. Businesses naturally want to increase their average CLV across their different segments. The formula noted in the link above highlights a few different variables that businesses can control:
- The contribution margin generated by each customer (or customer segment)
- The retention rates for those customers
- The marginal cost of serving that customer
Improve retention rates = increase CLV and revenues
Digital merchants can find easy “wins” to improve CLV, especially around retention rates. Retention rates are affected not just by clients who actively opt-out, but also by payment failures. A payment failure can happen, for example, when the Visa network goes down, or the customer is temporarily over his credit limit, or from other causes. Understanding the reasons behind and overcoming these payment failures can add 10-12% to a digital merchant’s revenues, based on data from our broad digital merchant network.
CLV helps digital merchants determine customer acquisition processes.
Since CLV accounts for both the gross revenue and the cost of serving that customer segment, it provides an excellent mechanism of understanding the relative value of your various customer acquisition channels. The channel that generates the largest gross revenues may not necessarily be your most profitable because of the inherent costs of that channel, whether in the form of fraud or even customer service costs. Therefore, CLV is valuable for long term planning and acquisition optimization, and should be a key metric to track.
In upcoming blog posts, I’ll address the two other key topics to think about when launching a digital business: (1) global expansion, and (2) the role of PCI and its effect on your digital business.
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