Smart retailers realize that repeat business (customer loyalty) is one of the most important — if not THE most important — objectives to achieve in both the short and long run. This is a key challenge for many retailers, both large and small.
As Bain & Company explains:
“Investing to earn the loyalty of your customers often requires trade-offs — you must decide which of the many investments you could potentially make will result in the greatest return. A clear understanding of your company’s loyalty economics will help you make those decisions. It will give you a quantitative basis for investments in long-term customer assets and provide a defense against the short-term, sub-optimal, ‘quarterly earnings’ mind-set that often tempts leaders to generate ‘bad profits.'”
“It is possible to calculate loyalty economics with great precision, if you have the resources and the tools to do so. If not, you can also make rough estimates that can help guide decision-making. This page describes a relatively simple way to get reasonable, rough estimates of the potential value that can be created by improving your company’s Net Promoter score and earning the loyalty of more of your customers.”
According to Bain, a simple formula for computing customer lifetime value is: