Why Customer Lifetime Value Is the Only True Way to Measure Success

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We recently witnessed Netflix’s alarming quarterly results, where they reported a loss of 200,000 subscribers in the first quarter—its first subscriber loss in over a decade. On top of that, they are predicting that another two million could go in Q2.

Much was made of the external factors that are impacting the streaming giant’s business, such as increased competition, the rising cost of living, and the hard-to-deal-with challenge of password sharing.

However, for me, the most salient question that this raised was whether success was even being measured in the right way.

It illustrated the point that for subscription businesses such as Netflix, the size of their user base really only tells one part of the story. Retention and usage are the missing ingredients if we want an accurate picture.

Traditionally, companies have focused on growing customer numbers. The logic being that the more customers you have, the more revenue you generate. While this holds some degree of accuracy, it is flawed logic simply because it doesn’t factor in those two other dimensions.

Firstly, let’s consider usage. Understanding how a customer interacts with a product or service, such as how much they use it, when they use it, and indeed what additional products or services they are using, allows companies to fully grasp how well their offering is being received.

Usage is also a critical factor because if your customers are not using the product or service that they are paying for, they are likely to stop paying for it—particularly as the cost of living is on the rise globally.

The second missing ingredient, retention, plays an equally important role. While businesses have always strived to retain their customers, we predict that by 2025, 75 percent of companies will “break up” with poor-fit customers. This is because they will realize that they cannot serve all of their customers in a way that maximizes revenue—their products, services, prices, or contract conditions simply may not suit some customers.

This is actually a significant positive, as businesses will be able to focus on acquiring and retaining better-suited customers whom they can serve over the long-term. This both reduces the costs of marketing to unreceptive customers and increases profitability of existing client relationships.

What these two metrics are ultimately relating to is customer lifetime value, or CLTV. This is the only metric that really matters.

CLTV measures the total value of an individual over the entire time that they are a customer of a company. A high average CLTV is an indicator of product-market fit, brand loyalty and recurring revenue from existing customers. Maximizing CLTV on an individual basis, combined with concentrating marketing efforts on these high-CLTV customers, results in a business model that targets sustainable growth. In essence, CLTV is vital to understanding the sustainability of profits.

So, how do you measure CLTV and take action using this data?

CLTV is all about understanding customer behavior dynamics. Subscription businesses such as Netflix, and others whose profits are driven by usage, rely heavily on their customer base to create value and deliver sustainable growth. However, these companies have a limited understanding of their customers’ behavior, and an inability to take data-driven actions quickly and decisively at scale.

They need a mechanism that is capable of analyzing usage and purchase patterns beyond human-scale to derive insights that guide enhanced CX decisions and actions. And this challenge cannot be resolved with transaction-oriented CX systems.

This is a critical issue that an AI has the potential to solve.

AI algorithms can analyze purchases and, more importantly, usage patterns at scale to recommend the CX actions at an individual customer level. The same algorithms can provide recommendations to companies to enable the “retain” or “break up” decisions, using CLTV as the deciding factor.

Simply put, the AI begs the question: Is this customer worth dedicating resources to? If the answer is yes, what personalized products and services best suit their needs based on previous and predicted behavior? If no, it might be time to break up.

In Netflix’s case, losing subscribers is not necessarily a bad thing if it enables them to maximize CLTV for their retained customer base. They need to grow their user base both collectively and individually, focusing on customer lifetime value to target profitable growth.

Vinod Vasudevan is CEO of technology firm Flytxt. Vasudevan has more than 20 years of experience in neural networks and artificial intelligence. The company works with 80-plus major enterprises worldwide to overcome one of the fundamental challenges of doing business: how to maximize customer lifetime value.

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