What Is The Importance Of Customer Lifetime Value?
Lifetime values and relationship values require the cradle-to-grave mentality. An organisation has got to want to attract the customer early in his buying cycle, and retain that customer for the duration of that customer’s buying life.
Good examples of this include mortgage businesses, which look to retain the customer over an extensive period of time, offering products as and when they come on-line, so that the customer remains a customer with them long after the mortgage has been settled. Banks and insurance companies are pretty good at applying the cradle-to-grave mentality also.
Setting about offering a service level that attracts and retains the customer year-on-year is the next task to be undertaken. Customer value has to be seen as a best estimate.
While the estimates can be quite accurate and certain accounting procedures followed, the actual value of the customer can be curtailed by many different incidences throughout the life cycle of the relationship. A customer could relocate to a different region where your service offering is not available, or the customer could succumb to a tragic illness and cut short the relationship, and many, many other possibilities exist.
However, the LTV estimate can give a bigger picture across the organisation if talking in terms of customer segments and growth numbers, which is a difficult calculation also. If the company is calculating year-on-year growth of a set amount and fails for any reason to reach that, the knock-on effects of those calculations and LTVs is quite significant.
You cannot grow turnover without the customers spending and if you have not attracted the level of customers with the LTVs that you assumed, then you are very unlikely to reach your end result.
There are three factors on which to base your LTV calculation: historic trends, current figures or future potential. The difficulty with future potential is that it’s not backed up by any actual data and therefore tends to be viewed with a little more scepticism.
Figures based on current trends are often seen as having been ‘cherry-picked’. The idea of basing figures on current activity assumes that current activity has been exceptionally good. That leaves us with the historic data, and in many ways this is the safest and best-recognised way of assuming future LTVs.
If you have a group of customers who have behaved in a certain way upon which you are basing your LTV activity, then the chances are this will be accepted as potential for future behaviour, given that your service levels and performance levels remain the same.
Any improvement in service levels can impact on the LTV calculation over a sustained period.
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