The ability to accurately estimate the customer lifetime value (CLV) of a customer represents one of the most promising – and profitable – advancements in Pricing and Revenue Management. Yet relatively few companies in the B2B space are doing it effectively – or doing it at all.
One big reason: They’re stuck in the outdated mindset that Revenue Management only seeks to maximize the value of a single transaction.
For B2B companies, the integration of customer lifetime value with pricing and Revenue Management principles ensures efficiency of immediate pricing and inventory allocation decisions without sacrificing long-term revenues, resources, or valuable customer relationships.
Now, let’s explore the process for making customer lifetime value an integral part of your B2B pricing and Revenue Management strategy.
Begin by leveraging data from your company’s Customer Relationship Management (CRM) system. A discerning analysis of this data will enable you to accurately predict the customer lifetime value for each customer. Don’t just look at annual revenues or contribution margin; include product mix, purchase frequency, purchase trends and cost-to-serve attributes to help derive the true potential of each customer.
Once you have an estimation of customer lifetime value, use that value as a customer segmentation factor. Segmenting by customer lifetime value allows you to give preferential treatment, on a specific transaction or terms, to your most valuable customers. Even more importantly, it creates a framework for increasing the value of your lowest value customers. A well-designed customer lifetime value segmentation can help you make informed tradeoff decisions between pricing, product mix, purchase timing, size and terms. This enables compelling contracts for your sales team at profit margins that hit financial objectives.
Whether it’s improving profitability, driving sales growth of a new product line or eliminating unwarranted discounts, using customer lifetime value to evaluate a negotiated deal ensures that a long-term Revenue maximizing deal will be made even if certain components or products in the deal are sub-optimal.
In short, by accurately quantifying the value of the each customer and forecasting the probability of additional value drivers or costs, companies can evolve from a transaction focus and construct sustainable relationships that are sure to deliver maximum value long after the thrill of the sale is gone.