Customer Value, ABC Customer Analysis and Customer Lifetime Value

Definition and uses

The customers of an enterprise are not equally profitable. For some, intensive care is valuable for others less. The value of a customer is determined in order to distribute the support costs to the right profitable customers and to achieve long-term profits. To define this customer value, e.g. ABC Customer Analysis, in which customer’s turnover and contribution margin are evaluated, or the Customer Lifetime Value in which the capital value is the focus.

The ABC Customer Analysis classifies the customers of a company into A, B and C customers. This breakdown is based on the contribution margins and turnovers of the individual customers. The customers with the highest contribution margin fall into category A, the customers with the lowest turnover into category C. The goal of the ABC Customer Analysis is, on the one hand, to keep the costs for customers with the lowest turnover, i.e., C customers, low and on the other hand to achieve more profit in the long term through intensive support of A customers. Ideally, according to the so-called Pareto principle, A customers account for 20% of the customer share, but account for 80% of sales.

The Customer Lifetime Value defines the values of a customer that can be generated by building a long-term relationship. This relates to the contribution margin that is realized as long as the buyer is a customer of the company. A distinction is made between the possible and actual customer lifetime value. While the latter only includes the expenses incurred by the customer at the company, the possible Customer Lifetime Value also includes the expenses incurred by the customer at competitors. If you know the Customer Lifetime Value of your customers, you can take it into account when supporting them. To save costs, customers with a high customer lifetime value and thus a higher potential can be supported more intensively than customers with a low customer lifetime.

Customer loyalty

What makes customers loyal?

The basis for strong customer loyalty is customer satisfaction. It expresses how satisfied the customer is with the requested product or service. The higher the satisfaction of the customer is, the higher his loyalty to the company.