“Customer Lifetime Value” (“LTV”) is a principle of formal marketing that took a lot longer than it should have, to receive active consideration by today’s consumer-driven industries.
Despite its fundamentality, “LTV” is, in my opinion, still given insufficient (and more often, scant or no) serious attention.
It’s probably self-explanatory but, for the record, LTV is a projection of the dollar value a business will derive from the full lifecycle of its economic relationship with any specific customer. There exist all manner of formulae – both sophisticated and simple – for performing this calculation.
Some organisations are, however, acutely aware of the LTV of each of its customers.
Take those mail order companies that sell commemorative coin sets, plates and the like. They’ll often make their first sale not at break even, but at a significant loss . . . in order to acquire customers and benefit from the LTV and upsell-across-time opportunities offered by the inevitable percentage of those customers who stick around for the long haul.
At Least Be Aware of A Customer’s LTV
While I’m not suggesting all other commercial entities start throwing big bucks at front-end customer acquisition, enterprises both large and small could do a lot worse than take a leaf from the books of the mail order operations when it comes to at least being aware of a customer’s lifetime value.
Here’s a particularly simple LTV formula (again, there are quite a few):
(Average Value of a Sale) x (Number of Repeat Transactions)
x (Average Retention Time in Months or Years for a Typical Customer)
= Customer Life Time Value
Let me use, as an example, a scenario that arose in my own world recently.
A health-conscious individual, I spend quite a lot (quite a lot) on vitamins and other nutritional supplements each month. I’ll often try new products on the market. If I have an ailment or a concern, my first port of call is always a supplements store . . . where it’s my fervent hope to find a source of solid product knowledge and some reasonably non-self-serving advice.
I recently faced something of a challenge; it hit me from left field. I took a trip to the local store of this type, and asked for advice. The staffer told me that the store now had its own “naturopath”, who (although not currently in the store) was particularly knowledgeable about the situation I’d described, and would be pleased to make some very informed recommendations.
Perhaps somewhat naively, in order to expedite things, I gave her my blessing to speak to the naturopath on my behalf, customise a relevant regime of supplements, and have them ready for me to purchase when I went by later that day.
How to Cut Your Own Throat By Being A Total Opportunist
This she did. And when I called in, I had ready for me a mountain of supplements from what I’m pretty certain must have been the brand they had the best margin or internal promotional deal going with, and a “prescription” that instructed me to take them at up to SIX TIMES the dosage recommended on the products’ packaging.
To boot, although that store has benefitted significantly from my custom in the past and knows that the avoidance of added sugars, flavourings and other such unnecessary ingredients is one of my “non-negotiables”, they’d conveniently overlooked that . . . in favour of racking up a few more sales of their brand of the month.
I’ve only ever entered that store once since then: to return the products after I got them home and read the labels and the “naturopath’s” recommended dosages.
That store risked – and indeed sacrificed – considerable LTV from this customer for the sake of its till receipts of the day.
Let’s look at a more formal example I found on the web:
Source: How To Calculate Lifetime Value
I hope so.
Sometimes a customer isn’t “just a customer”. He or she represents a substantial income stream – over time.
Too many businesses lose sight of that . . . or haven’t yet grasped it at all.
To their extreme detriment.