As the insurance industry adapts to the global digitisation trend, customer lifetime value is increasingly seen as the most important metric for performance and sustainability, writes Katherine Peaker, Head of Capita Octal Business Solutions, in the first of a two-part article.
The coronavirus pandemic has accelerated the world towards the tipping point for digital adoption, and the insurance industry is no exception. Unfortunately, the sector is lagging behind on digital readiness(1), and it will require a step change to come into line with customers’ expectations and to confront new digital entrants.
To focus our minds on this new challenge, a new metric is needed. Traditionally, insurers have focused on value of new business and embedded value, but customer lifetime value (CLV) is the metric that they need to focus on in the future.
CLV can be applied in insurance to maximise the value that each customer delivers to a business, but that’s easier said than done. In this article, I make the case for CLV and outline key approaches, including the adoption of data-led, digital customer experiences.
What is CLV?
CLV is the total worth of a customer to a business over the whole period of their relationship. Why is it so important? Finding new customers is expensive — between five and 25 times more expensive than keeping existing ones(2) — but retaining 5% more customers can increase profits by 25% to 95%(3).
According to Forbes, CLV is the only metric that matters(4), because it translates customer experience measures — such as customer effort score, customer satisfaction, net promoter score and churn (the rate at which customers leave) — into a measure of each customer’s business value.
From a customer’s point of view, businesses that focus on CLV tend to inspire brand loyalty, have more timely and relevant marketing and create a personalised customer experience.
Customer-focused businesses are more profitable
The CEO of arguably the most successful company in the world and the richest man alive, Amazon’s boss Jeff Bezos endorses an “obsessive-compulsive focus on the customer”. Insurance companies should copy this page of the Amazon playbook but, unfortunately, they regularly score poorly in surveys on customer trust and experience, particularly in terms of the digital customer experience.
Most insurers focus on product lifetime value, probably because of how they hold data on customers and how effectively they can analyse it. Making money out of customers throughout the time they have a relationship with you — or, even better, retaining them from cradle to grave — remains the key reason why CLV is such an attractive model for insurers to pursue.
Digital platform business models are driving higher valuations
The last decade has seen a sea change in the types of businesses that dominate the corporate landscape. In this time, the highest valued businesses have changed from those providing products to those providing platforms, which create value by facilitating exchanges between two or more interdependent groups, usually consumers and producers. Like Facebook and Uber, these businesses don't directly create and control inventory via a supply chain the way that linear businesses do.
Product-based insurers can expect to achieve valuations of around two times the business they write, whereas a digital platform-based insurer can have a valuation of up to 20 times the business written(5). For this reason, Tencent, Berkshire Hathaway and Alibaba are the only companies with insurance credentials to make it into the top 10 based on market capitalisation.
And CLV is the driving metric in these platform business’s model.
Calculating CLV
At its simplest, CLV is the net profit a business receives from a customer over the time they spend with you — typically this is assumed to be 20 years. Some companies, such as Starbucks, use a sophisticated method in which they calculate three different values for CLV and take the average as the final figure(6).
The three calculations make different assumptions about how many years each customer keeps coming back and the cost of each transaction (which might be 70-80% of the average spend). By averaging these calculations, a more accurate CLV can be calculated.
Referrals and word of mouth
Another way to look at CLV is to consider the value of tracking customers’ referrals to friends and family. There’s also the potential for customers to become brand advocates – not through providing doorstep endorsements but by capturing direct feedback. Customer advocacy is the central metric and, again, this approach requires a culture shift to make proper use of it as a tool.
What’s important here is looking at the value of customers today and the potential revenue they could provide in the future.
Many customer-focused businesses, especially platform and ecosystem ones, are increasingly looking at the future potential of their relationship with customers, because it offers up-selling and cross-selling opportunities.
Technology and the human touch
CLV promotes an approach in which understanding customers is central, generating rich data about their choices and habits and the incentive to analyse it, so that customer-centric decisions can be made to enhance products and services. Technology is a big part of creating this capacity but just as important is the cultural shift required. Making CLV your business’s key metric will generate the energy to make this cultural and technological shift.
Using data will improve many of the touchpoints that customers experience, and it will increase your opportunity to interact with them. More opportunities present more chances to offer them an experience that they value and increase their potential CLV. But technology alone can’t satisfy that — your customer service agents and the expert, empathic conversations that they have with your customers are still a vital part of the picture. Research from ResponseTap found that more than half (55%) of consumers had bought insurance over the phone in the previous 12 months(7).
Making CLV work in your business
There are many ways to implement CLV in a business, and insurers need to determine which ones work for them.
Using data analytics to target your customer messaging and propensity models to hone your products will drive up engagement and increase your opportunities to build a relationship with your customers. A personalised reward programme is a great way to increase loyalty, and therefore CLV.
A holistic approach to CLV may also present cross-selling opportunities that didn’t previously exist. Insurers should consider engaging even the ‘unprofitable’ segments, exploring what products might interest them. Bringing these customers into your database keeps the door open to finding a way to make the relationship profitable in the future.
To maximise the benefits of a CLV approach, you must define who your customers are, then define the proposition. Use data and analytics to know your customers better and then focus on increasing value for you both.
The industry is delivering more products that offer far greater flexibility than in the past. As policies adapt to your customers’ changing lives, so too will other services that are based on the customer lifecycle, such as concierge offerings and other ‘add-ons’.
Companies focus on what they measure. By consciously selecting CLV as the headline metric, insurers will drive the new behaviours required to succeed in the digital platform economy. And by focusing more on loyal customers, insurers will add disproportionate value to their businesses.
In the second part of this article, I’ll examine growing customers’ lifetime value (CLV) through digital customer experiences – the need for a platform approach.
Contact us
To learn more about Capita’s market-leading expertise and capabilities in cart abandonment recovery, outbound marketing tools and e-commerce solutions, and the tangible benefits it can deliver for your business, contact Business Development Manager Nathan Robinson on 07730 001065 or at Nathan.Robinson2@capita.com, or contact your account manager today.
References
[1] tdi-pov-industry-warning-digital-tipping-point-is-approaching-insurers-faster-than-expected
[2] the value of keeping the right customers
[3] the value of keeping the right customers
[4] customer-lifetime-value-the-only-metric-that-matters.
[5] How Much do Insurance Companies Spend on Marketing?
[6] Latest Insurance Study Reveals Strong Link Between Marketing, Technology Investment, and Revenue Growth (prnewswire.com)
Gabriel Swift
Account Based Marketing, Capita
Gabriel specialises in Account Based Marketing, With over 25 years’ experience working in IT organisations, Gabriel is passionate about innovation, creative thinking and enabling and supporting Senior Sales stakeholders in achieving their goals.
