The New Formula for CLTV

Here’s the math you know: As a hard number, customer lifetime value (CLTV) is the predicted total net profit of a customer over the span of his relationship with a company. Since it’s a predictive measure, ensuring its accuracy has its challenges. Nonetheless, many marketers embrace it wholeheartedly as a guide to marketing spending. One reason is its usefulness for helping marketers to determine how much to invest per customer on acquisition. In some cases it can help calculate how much to allot to serving a customer.

As someone who’s more wordsmith than mathlete, the formulas used to calculate CLTV as defined in Marketing Metrics: The Definitive Guide to Measuring Marketing Performance—“the present value of the future cash flows attributed to the customer during his/her entire relationship with the company”—send shivers of pre-calc down my spine. So, if you’re anything like me, thinking about the new math of CLTV probably has your head spinning.

What is the new math? As Natasha Smith discuss in “Redefining the High-Value Customer” (page 14), influence is a growing part of the equation when calculating customer value—whether in the moment, or over time. Customers who recommend and refer, evangelize and advise, and whose contacts purchase as a result, are bringing real dollar value to the organizations they’re advocating. How do you add that value to the CLTV calculation? Or do you? Perhaps a customer who is predicted to have a low CLTV based on spend and profit is highly influential and frequently helps convert prospects to customers. Should that customer’s LTV increase as a result; should she be considered a high-value customer if her net profit is lower than customers who are high-value in terms of revenue?

But the new math doesn’t end there. Consider customer engagement. The more engaged a customer, the greater the potential for retaining that customer and encouraging repeat purchases at a lower cost than other customers. In fact, in some cases, loyal customers require little marketing investment to retain and grow. For example, at this point in my customer lifecycle I’m a Godiva fan and advocate; regardless of the frequency with which Godiva markets to me, I’ll find reasons to buy. And it takes only one email to get me to try a new product; all follow-on emails for the new treat are inconsequential.

What’s more, an engaged customer is also highly likely to be a promoter. (You say chocolate; I say, let’s get Godiva.) Considering these factors, how do marketers then calculate CLTV? Does a loyal customer get credit for her lower retention costs? Does that credit increase if she’s also an influencer?

Perhaps these softer measures are simply a bonus, not meant to include in the cold, hard mathematical calculations of customer lifetime value. But as engagement and influence increase in importance in terms of competitive advantage and differentiation, how to calculate their value is a worthy, if not essential consideration.

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