Skip to Content

Maximizing customer Lifetime Value (LTV) is considered to be the ultimate measure for optimal customer relationship management (CRM).

LTV is usually considered as the total net income an organization can expect from a customer during their relationship. The definition of LTV and the calculation method depend on many factors, such as customer profitability and its trend, the expected length of the relationship, indirect expenses and even indirect value contribution, such as opinion leaders in web 2.0 environments and more.

Beyond the technical difficulties in creating an LTV model and setting up the supporting technical solution for its calculation, the LTV model also requires the blessing of the different stakeholders, so customers will be treated in a coherent manner across all processes and interactions.

A simplified LTV model will typically consider 3 factors: the customer value over time, the length of service (LOS) and some discounting function that can project past and future value contributions to net present value.

We can see that beyond the financial aspect of discounting, maximizing LTV should be achieved by optimizing a product of the length of service and value contribution over time. Of course, loyalty and margins are often conflicting forces – providing services for free will increase the value proposition in the eyes  of the customer but such organizations will need to look for other revenue models than direct payment for these services.

The day-to-day dilemma of organizations with regard to their marketing and customer retention activities is finding the optimal offer that will maximize LTV.

For those of you who hate words and long sentences here is a short description of what I was talking about:

 

 image

 

Where

  • V(t) – Customer Value at time t
  • S(t) – length of service or survival function – customer existence at t
  • D(t) – discounting function to reflect future value at present term

I guess with all that said, I’ve lost all my audience for today … :).

So before I end this posting, I want to mention that I will be happy to get your feedback and hear if drilling into practical estimations of LTV and its use in modern CRM is of interest to the readers of this blog.

To report this post you need to login first.

4 Comments

You must be Logged on to comment or reply to a post.

  1. Vijay Vijayasankar
    I think it is pretty hard to do this in practice .

    1. B2B and B2C needs two very different models, since definition of lifetime varies.
    2. “In the long term every one is dead” – which means we cannot fund on marketing with abandon thinking of future value. Our ability to predict is sharply lowere as we tend from zero to infinity.
    3. I never fully understood if value is a gross figure or a net figure (as in does LTV already consider the cost to get that value). Without cost factored in over the same time horizon, it doesn’t mean much to look at LTV in itself.

    (0) 
    1. Shuki Idan Post author
      1. “B2B and B2C needs two very different models” – you are right, but more than that => it is always an approximation so beyond B2C and B2B – different industries and different organizations use differnt models for v(t) and s(t).
      2. “In the long term every one is dead” – again you are right. And it is more complex than because at each moment and with each action the componnets of the equation change. But still in the short term it is useful and I will try to put it to some framework in a future posting.
      3. “gross figure or a net figure” – if you want to maximize margins it should be a net figure and of course the cost of actions, such as marketing, sales and service should be factored in.
      (0) 

Leave a Reply