The Money or Your Life – Some Reflections About Lifetime Value (LTV)
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:
- 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.