The Wheel of Fortune Strategies to Maximize CLV:

Acquiring Profitable Customers:

The strategies listed above are aimed at selecting the right customers, managing them profitably and retaining them through optimal allocation of resources. The knowledge acquired in implementing these strategies could be used in acquiring prospective customers with high profit potential. This approach to link acquisition and retention of customers to firm profitability is a key contribution of the CLV-based approach.

While making direct marketing investment decisions, many marketers still overemphasize short-term cost over long-term gain. This leads to a situation where companies would pursue customers who are cheap to acquire and cheap to retain without essentially being profitable. Conventionally, most companies use customer acquisition and retention rates to measure their marketing performance. This approach could diminish returns to the firms as they might be spending more on acquiring and retaining a customer, than on what the customer brings in as revenue. Further, different groups of customers require different levels of acquisition/retention spending to maintain their relationship.

The CLV approach recommended in this book recommends optimizing the acquisition/retention costs and directly links such efforts to overall profitability. This strategy helps firms to decide which customers are worth chasing and which dormant customers should be pursued to come back to the firm. Firms should use customer profiles to identify the customers who are most likely to be profitable. This can be achieved by identifying customers with similar characteristics as existing high-CLV customers, and by adopting an appropriate marketing strategy. By observing the customer behavior of a catalog retailer, customers were segmented based on their cost of acquisition and cost of retention. It was found that the largest segment (32%) was made up of customers who were easy to acquire and retain. But, they accounted for only 20% of the total profits. On the other hand, 40% of the total profits came from the smallest group of customers (15%) who were expensive to acquire but cheap to retain. Therefore, linking acquisition and retention to profitability helps the firm to target and retain profitable prospects and customers. This demonstrates the importance of efficient allocation of the marketing budget across acquisition and retention initiatives, in order to maximize profitability.