For many companies, a fervent belief exists that all customers are important, and all should be treated equally. While this makes for a good public relations or vision statement, it ignores the relationship of customer value to company profit. All customers do not contribute the same value to a company. A simple analysis can reveal surprising insights into relative customer value. In general, the Pareto principle applies, in which about 20 per cent of customers represent about 80 per cent of total revenues.

Recognizing the importance of a small segment of highly valued customers translates into several imperatives. First is managing the cost to serve customers. While a reasonable level of customer service is appropriate for all customers, it makes sense to balance the cost of serving a customer with the current or potential value of that customer. Combining this principle with customer preferences can drive customer profitability, customer satisfaction and company value.

The second imperative is product strategy. Too many companies make the mistake of managing product offerings based on the perceived needs of the entire customer base, rather than tailoring offerings to the needs of those customers who actually drive profitability. Measuring only the value of customers at one point in time is not sufficient. What about customers who have spent a lot in the past but are not currently spending at that level? What about customers who are not currently valuable but will likely be so in the future (such as college students)?

Customer lifetime value (CLV) analysis provides an approach to measuring customer value over time. CLV captures the net present value of the future stream of revenues less the costs associated with a customer. The CLV formula also helps to identify the factors that drive value creation, including the costs and benefits of acquisition efforts, up-sell and cross-sell marketing, and retention activities, as well as the impact of customer referrals. Although more easily measured when applied to an aggregate customer base, CLV can be a valuable measure of customer profitability. It clarifies the extent to which a company should invest in marketing, sales and service efforts, and at the individual level guides how much should be spent on a given customer. CLV then becomes a useful guideline for making quantitative resource allocations, especially in investments such as customer databases, customer analytics, customer interactions, and other CRM-related resource decisions