Think Customers: The 1to1 Blog

These are all good comments, but it's important to remember what LTV really is at its root: it is simply a way for a firm to estimate the present value of a customer's likely future actions, including purchases, costs, referrals of other customers, and so forth. LTV is, of course, an "idealization" of the actual financial value of a customer as an asset. No one can ever measure true LTV, no matter how much data you have and no matter how sophisticated your analytics are.

Frankly, we think that most businesses using LTV operationally today do so in a fairly self-interested way, making decisions, as Gregory Hopper says, that tend to be more in their own interest than in the interest of their customers, and this is a problem. But the fault lies with their business method, not with the metric.

Understanding a customer’s value profile – what is their long-term likely patronage, what is their growth potential, etc – will help a company establish its own financial objectives for the customer. Do we want to concentrate on customer retention, growth, cost reduction, or what? But to realize these objectives we must somehow change the customer’s behavior – indeed, you could argue that this is the central purpose of all marketing, to get a customer to do something he was otherwise not going to do. And to accomplish this we must be able to appeal to the customer’s own motivations. What is it that the customer needs, and how does he see the world?

Only by blending our understanding of a customer’s financial value with an equally valid understanding of what the customer’s own needs and motivations are can we achieve our objective. In short, we have to be prepared to see our business through the customer’s eyes.

If the only reason you try to understand your customer is to sell more stuff, then you’ll probably fail. But if you try to use your understanding of a customer to deliver more value to the customer – a faster delivery, less expensive product, better fit, etc – then you’ll probably also sell more stuff.

Even if CLTV is not perfect, organizations that practice it have got the advantage of better "understanding or knowing" their customers and also make a more precise assessment of what can be expected from their relationship, as well as it motivates personnel and leads to their closer relationships with customers.
But more of all, it contributes in planning and strategy building, thus taking part in the future evolution of the organization.
As an end, I think a good CLTV should take into account both tangible and intangible assets, dosage being done according to the specific situation and goals of the company, mainly customer sensitiveness to higher satisfaction, competition, technological level in the sector and its overall growth rate and tendancy.

I have mixed feelings about the concept of lifetime customer value. In general, I don't like it, especially when dealing with innovative products.

Treating a customer like a "financial asset" is likely to lead a company to make decisions (product mix, pricing, etc.) that are purely in the company's interest and not the customer's best interest. Take this phrase from the ROC article: "If we can get the company to accept auto-replenishment...". This is not acting in the customer's best interest.

I do like Hannover Re's segmentation (or, as they call it, "value tiers"): loyal customers, habitual customers, variety seekers, and switchers. A LTV strategy will (in my view) lead a company to focus on the first two segments, because marketing and R&D costs will be lower.

But...revenue and profit might be higher by appealing to the "variety seekers" and "switchers" because they may like new, innovative products and transfer their buying power to the companies that offer such products (which often have higher margins because there is no commoditization yet at work). If a company can continue to offer such products, the "variety seekers" stay customers. A little paranoia about whether your customers are "loyal" or "switchers" can have a positive effect on one's innovation efforts.

Not to put too blunt a point on this, but I think that Cadillac went with a LTV strategy years ago, and wound up making lousy cars (living rooms on wheels) that appealed to old (even by GM standards) people. If they had continued to be the "Cadillac" of automobiles, they would have stuck with producing innovative cars that were the best that money could buy.

In this whole discussion, I am assuming that loyalty and LTV are equivalent. They may not be, but I don't see anything in the article or surrounding items that says otherwise.

I agree that the soft data is critical to eveluating the true value of a customer relationship. In fact I would weight it equally with financial hard data. Many customer relationships can improve morale thoughout the organization but may not be the most profitable when measuring profits in a traditional sense. These customers become motivational returns from the relationship that may also stimulate improvement in other relationships. As has been said before,it is the total relationship that needs to be measured.
Ray Pasquale, Maine