When you think of the demand curve for your business, you imagine a general downward sloping curve. Generally, economic theory would dictate that as you decrease the price, the quantity sold might increase. However, decreasing the price might not be the revenue maximizing action, because things would depend on what economists call the elasticity of the demand. The elasticity of demand is the percentage change in goods demanded for a percentage change in price. If the demand is highly elastic, then lowering prices will raise revenue, but if the demand is highly inelastic, then lowering prices will lower revenue.
We see a similar dynamic play out in the Customer's Lifetime Value. Suppose that you were to give a discount to a particular group of customers. Would that raise customer lifetime values so that total revenue is higher, or would it lower customer lifetime values so that total revenue is lower? This is a question that is played out over and over again in the relationship between the customers and the seller.
Consider the case with your "best" customer, in terms of generating the highest amount of revenue over their lifetime for your business. If you gave your "best" customer a discount, would that generate more revenue for you over their lifetime for your business, or less? Paradoxically, the answer is that it would most likely generate less revenue. The reason is because at the current prices, their demand is satiated. If you gave them a discount, it would not increase consumption enough to cover the discount.
Consider the case of your "worst" customer, in terms of generating the lowest amount of revenue over their lifetime for your business. These are the people who will most likely churn. If you gave these people a discount would they generate more revenue over their lifetime to cover the discount and have a gain, or would they generate less? Unsurprisingly, they would most likely still churn and use your discount, so your business would lose revenue.
However, there is a particular class of customers that you currently have, which would most likely grow their consumption given the right incentives. They are the ones that need to be introduced into to new products, or features, or even to help their own businesses grow so that they could consume more. They have the potential to grow into your "best" customers. They are however, a very select group that is hard to identify.
With our AI software that forecasts future lifetime values we can identify this group easily and help you avoid incentivizing the wrong groups. We are able to see what levels of incentives are necessary to induce changes in behavior and the resulting gains or losses.
Because we are able to forecast down to individual future purchase values for each customer, you can target only those customers that bring you a net gain. We can even automate this feature for you. Contact us for a demo.