Customer Lifetime Value: Thinking Better, Longer

2023-03-22 |  Caz Hanrahan

Pharma is rapidly redeploying its commercial and medical affairs budget to digital engagement and the opportunities it offers to reach customers. Over half of commercial spend is already now in digital and this is expected to increase to 75% by 2025.

This evolution towards digital engagement has created a conundrum for the sector: with so many competing priorities and pressures, is the budget being spent in the right way? Furthermore, the optimism that digital transformation brings also raises questions over whether this increased investment is delivering the right outcomes for both industry and the customer.

On the flipside of cost, digital transformation within the sector has also opened the door for a shift from a product-first to a customer-first strategy based on the evidence that organisations who manage customer experience (CX) achieve greater return on investment.

To understand the value of customer spend, as well as the potential for that spend to generate return on investment, we need to be able to measure and evaluate the quality of the activity.

To date, the CX metrics used to track customer experience activities include Net Promoter Scores (NPS), Customer Effort Scores (CES), and Customer Satisfaction Scores (CSAT). While they can provide helpful insights for decision-making, they have some limitations, in that they mainly focus on discreet moments in the customer journey and reflect how the customer thinks and feels about a specific activity, rather than the overall relationship.

For more information on these CX metrics I recommend you read the Second Opinion publication on PEN's Customer Experience Measurement Framework.

What might it look like to include a measurement that also looks at the value over the entire relationship the customer has with the organisation? Moving past more traditional measures of value, we are strong supporters of the use of ‘customer lifetime value’ (LTV) to better inform investment decisions.

What is Customer Lifetime Value?

Customer Lifetime value (LTV) is the value a business derives from its customers during their association with the organisation/brand.

Think of LTV as an overall health check on your customer experience efforts that links your investment in CX to overall revenue.

It can help target the right customers.

As investment in digital increases, so too does the potential to reach more customers – therefore delivering the right experience for the right customer becomes increasingly challenging. 

Understanding the lifetime value of each customer can help prioritise activities towards the customers or segments which bring the most value to the organisation/brand and better manage the ratio of investment in customer acquisition versus retention.

Figure 1: A graph of how cost to serve customers decreases as the value provided by the relationship rises. The longer the relationship, the easier it is to surface and meet the needs of those customers, decreasing the cost required to deliver the same level of value. That is to say, the cost to acquire those customers (1) is far greater than the cost to retain them (2), which is what LTV recognises.

It is the one KPI that is most indicative of the effectiveness of CX strategy.

It has been shown across sectors (including pharma) that companies which manage their customer experience do better than those that do not. Ensuring the delivery of superior experiences for high value customers must therefore be paramount.

An understanding of LTV can help pharma make decisions in the context of the entire customer journey beyond a single activity. For example, a stable or increasing LTV score can indicate efficiencies in the cost to serve the customer as well as effectiveness of your engagement activities in generating value.   

Calculating Customer Lifetime Value

At its simplest the LTV formula leverages the following variables to decide the LTV score:

  • Revenue
  • Relationship duration
  • Cost to serve (promotional spend)

Starting with the length of time of the relationship and quantification of promotional spend efforts is a good place to venture into LTV calculations. 

Example LTV Formula

Customer Revenue * Duration of the Relationship – Cost = Customer Lifetime Value (LTV)

Average customer revenue per year, multiplied by the duration of the relationship in years, minus the total costs of acquiring and servicing the customer, equals the Customer Lifetime Value (LTV).

Calculating and refining LTV requires the commitment and ongoing participation of multiple disciplines including sales, marketing, finance, and IT. You should make sure you set out what you want to capture, why, and how in order to build a process that is robust and repeatable, allowing for the metric to inform decision-making.

Putting into practice

It’s important to understand that it is the essence of LTV that is most important, not the textbook approach. While the example LTV formula is as good a starting place as any to introduce LTV into your measurement plan, sometimes you have less information, or different types of data that must inform the calculation. Experiment with it, as long as you preserve the concept of returned value over time.

You may even consider an incremental approach in introducing LTV and building on the variable you use to calculate the LTV score. There are other important considerations in customer engagement that can be included, for example the influence that customer has on other stakeholders that could also be considered in the LTV calculation.

Finally, to help with adoption, consider applying agile principles including experimentation within a single team who could champion and help drive its broader adoption. There are different ways to start small to get buy-in and traction for leveraging LTV but getting it right will enable you to truly understand and make better decisions about your customers' activities across the entire customer journey.

Prioritise LTV because...

…it will act as a dowsing rod to identify and prioritise value

As the volume and complexity of customer engagement activities increases, understanding what delivers the most value is a crucial component of your strategy. Calculating and analysing LTV turns this into an easy and systematic input into planning conversations.

…it will help close the loop on your CX strategy

With growing importance placed on the delivery of superior customer experiences, organisations are rapidly seeking to solve the challenge of how they evaluate the quality of their customer outcomes and how they correlate to returned value. Build LTV into your CX metrics to close the loop on how experiences deliver value to both your customers AND your business.

…it will build sustainability into your brand planning

We’re entering a period of multi-indication products and launch-rich pipelines. Ensuring your organisation can balance the needs of these ripe fruits requires reliable ways to streamline operations and secure long-lasting value over time. The graph below shows how LTV grows over a product lifecycle – maximising this as early as possible by prioritising the right customers will deliver more, easier, longer.

Figure 2: A graph to show the customer acquisition curve of a traditional pharma product, and how LTV behaves throughout this. Most importantly here is the opportunity to improve the speed at which LTV is generated and invested in (1), and therefore shore up a solid base of customers to secure steady value in a product’s later stages (2).

For further information on Customer Lifetime Value and how it may help deliver your CX strategy please contact Caz Hanrahan, Management Consultant at PEN.