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Customer Lifetime Value

The actual value of a customer is equivalent to a quantity that is frequently called the customer lifetime value (LTV), or the net present value of the stream of expected future financial contributions from the customer. Every customer of an enterprise today will be responsible for some specific series of events in the future, each of which will have a financial impact on the enterprise—the purchase of a product, payment for a service, remittance of a subscription fee, a product exchange or upgrade, a warranty claim, a help-line telephone call, the referral of another customer, and so forth.

You can download excellent powerpoint slides on Marketing Strategy and Marketing Management HERE. Each such event will take place at a particular time in the future and will have a financial impact that can be calcu¬lated at that time. The net present value, today, of each of these future events can be derived by applying a discount rate to it to factor in the time value of money. LTV is, in essence, the sum of the net present values of all such future events attributed to a particular customer's actions.

Although sophisticated modeling methods help to quantify LTV, many vari¬ables will not be easily quantified, such as the assistance a customer might give an enterprise in designing a new product, or the value derived from the cus¬tomer's referral of another customer. Any model that attempts to calculate indi¬vidual customer LTVs should employ some or all of the following data, quantified and weighted appropriately:

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• Repeat customer purchases
• Greater profit and/or lower cost (per sale) from repeat customers than from initial customers (converting prospects)
• Indirect benefits from customers, such as referrals
• Customer's stated willingness to do business in the future rather than switch suppliers
• Customer records
• Transaction records (summary and detail)
• Products and product costs
• Cost to serve/support
• Marketing and transaction costs (including acquisition costs)
• Response rates to marketing/advertising efforts.

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The objective with LTV modeling is to use these data points to create an historically quantifiable representation of the customer and to compare that cus¬tomer's history with other customers. Then the enterprise can begin to build a statistical model of the customer's trajectory with the enterprise, and project the customer's future trajectory—including how much he will spend and over what period.

Source of Reference:
Don Peppers and Martha Rogers, Managing Customer Relationships: A Strategic Framework, Addison Wiley. You can obtain this fine book here

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