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Profit Or Loss? The Difference Is Customer Lifetime Value

By Michael Deely

Measuring Customer Lifetime Value At Your Middle-Market Bank Is The Key To More Profitable CustomersKeeping your bank profitable is a top priority for every member of your staff, whether you’re running a retail bank or catering to B2B customers. However, no matter your target customer base, determining the profit – or loss – potential of each client is essential if you’re looking to keep your bottom line healthy.

In the first post of this series, we covered the importance of a customer profitability analysis for retail banks, and last week, we covered customer profitability analysis for business banking customers. Today, we’ll address the calculation of customer lifetime value – and why your middle-market bank can’t afford to ignore this critical metric.

Reorienting Your Bank Around Customer Lifetime Value

Customer lifetime value (or CLV) is the worth of a customer over the length of their entire tenure at your bank and is a much more complex calculation than just net profit or total sales. Using customer lifetime value as a metric requires your entire bank to shift its focus from quarterly profits to the long-term health of customer relationships.

Not only does CLV help you track your customer profitability, but it also provides an upper limit on your customer acquisition costs. Thus, a thorough customer lifetime value analysis helps you make better-informed decisions when it comes to marketing, sales and pricing for new customers.

While using other metrics (like maximizing product value or curbing transactional costs) might be valuable to your marketing analysis, these metrics are only a distraction for your front-line employees.

Instead, your retail banking staff needs to know which types of customers are worth pursuing for long-term value and which ones are likely to switch banks solely for lower prices. Understanding the difference between those two types of customers guides your front-line employees so that they invest their time and resources appropriately – and maximize your customer lifetime value.

Shifting Your Sales Relationship With Customers

Maximizing customer lifetime value is about sustaining long-term relationships with patrons and clients, so the quickest way to undermine your bottom line is to use inappropriate sales tactics or spend resources pursuing the wrong customers. Rather, you need to focus your sales efforts on the customers that show the highest potential value over their lifetime.

Using a customer profitability analysis, start pricing and selling your products according to a customer’s likely future value. Gauge a prospective customer’s long-term profitability by analyzing the cost and revenue components across all of your products in an ideal customer’s lifecycle. Then, determine the sequence and packaging of products to optimally support each customer’s lifecycle stages.

Customer Acquisition Cost Versus Lifetime Value

Using CLV as a metric also shifts how you consider customer acquisition costs. Instead of pursuing the cheapest customer acquisition possible, CLV helps you enhance your customer acquisition process for maximum lifetime value rather than just minimum cost.

For example, one particular customer acquisition channel might bring you new patrons at the lowest possible price, but when you consider the CLV of customers from that channel, they might not be your most profitable. Your best strategy is to optimize the acquisition channel with the highest CLV so that you minimize customer acquisition costs and maximize your bottom-line growth.

Understanding and using customer lifetime value analysis is an imperative for your middle-market bank. When you follow a structured approach and implement CLV into your long-term strategy, you achieve a significant competitive advantage by selling the most profitable products to the most lucrative customers.

To keep your bank’s bottom line healthy, your banking operations need to function as efficiently as possible. Click below to download a free whitepaper from Big Sky Associates and discover how process improvement directly benefits your bottom line.

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