Customer Lifetime Value Framework
Posted by Jeffrey Henning on Fri, Apr 02, 2010
Maximizing customer lifetime value (LTV) is a great way to get a business to broaden its approach from simply acquiring as many new customers as possible to being concerned about how the customer is treated in the long term. Concentrating on LTV represents a broader mandate for marketing departments than they have historically fulfilled.
A firm's actions, especially its marketing programs, affect the acquisition of new customers, the retention of existing customers and whether existing customers expand their purchases from the firm. These components make up customer lifetime value, "the present value of all future profits obtained from a customer over his or her life of relationship with a firm". Customer equity (the sum of the lifetime value of current and future customers) in turns affects the overall value of the business.
This framework, popularized by "Modeling Customer Lifetime Value" (Gupta, Hannsens, Hardie, et al; 2006), provides only a high-level look at LTV. Actual lifetime value models vary significantly by business and industry. For instance, contractual business arrangements (e.g., cellular phones, magazine subscriptions) have different characteristics than non-contractual arrangements (e.g., grocery stores, retail in general), where rules of thumb are used to determine if a past customer is still a customer (i.e., has purchased in the past 12 months). Among the modeling techniques to choose from are RFM (Recency, Frequency, Monetary value) models, probability models, persistence models, algorithmic models and diffusion/growth models; such models are invaluable for estimating the ROI on marketing investments. Attitudinal data (e.g., survey results) are typically omitted from LTV models since such data is only available for subsets of the customer base.
What are the implications for survey research? This framework was instrumental in shaping Bob Hayes' three loyalty indices, which have strong predictive validity for actual purchases, recommendations and successful cross-selling:
When assessing customer loyalty, don't confine yourself to measuring just one aspect of customer lifetime value.