The Wheel of Fortune Strategies to Maximize CLV:

Viral/Referral Marketing Strategy:

While the CLV metric has been shown to outperform all other behavioral metrics such as RFM or SOW, it does have one main limitation as a complete measure of a customer’s value. Even though all CRM programs collect data on transactions and demographics, they fail to measure data on customer attitudes. And, even if they do collect data on customer attitudes, such as in the form of surveys, these attitude measurements are often left out of the estimation of CLV.

It is clear that not only can customers contribute to the firm through their own transactions (direct profits), but they also have an impact on the transactions of other customers through word-of-mouth and referrals (indirect profits) and both can increase the value of that customer to a firm. In a recent study, it was shown that less behaviorally loyal customers tend to have a stronger impact on referring new customers when compared to more behaviorally loyal customers. It was also shown that the referral process is not only able to bring in customers without excessive marketing expense, it is also able to bring in customers who were not likely to join through the traditional advertising and promotions by the company. While designing a marketing strategy to target our highest value customers, we need to consider the actual value that each customer can bring to the table in terms of both direct and indirect profits.

There are two approaches for maximizing customer profitability – maximizing CLV and managing customer referral behavior. The concept of Customer Referral Value (CRV), which is defined as the value of the referral behavior for a specific customer, is introduced in implementing this strategy. This metric enables managers to measure and manage customer referral behavior. This dictates that customers be valued based on their indirect impact on the firm’s profits, through savings in acquisition costs and addition of new customers by way of customer referral.