A Warning About Over-Reliance on the Lifetime Value of a Customer

Over the last several years, much has been written about the implications of measuring (or at least attempting to measure) the lifetime value of a customer (LTV), sometimes called customer lifetime value (CLV). The underlying theory is that if you can determine the revenue potential of all of your customers, you can direct your marketing resources at the accounts that have the highest potential yield. And by doing so, you’ll effectively maximize the ROI of your marketing dollars. It’s a great theory and in practice, does yield some great benefits. However, it’s also worth noting that there are limitations to this practice that if not avoided, can produce negative results.

Perhaps the biggest danger of over focusing on LTV is that a company might over-invest in programs and initiatives that seek to capture profits from the most active, highest spending customers. This not only ignores opportunities from customers with growth potential but also from prospects and former customers who also represent attractive profits if they can be cultivated into active customers. And since it is said that companies will lose 50% of their customers in any given five-year span, the need to also focus your marketing efforts on new customer acquisition cannot be ignored. While over-reliance on an LTV model will lead to an increase in profits from high-value customers, it will at the same time lead to a steady decrease in your pool of customers and overall profit.

All of this underscores the need for companies to market to and communicate with all of their customers and prospects. We know that by properly utilizing LTV, a company can allocate their marketing resources accordingly and develop programs and materials that are targeted to specific types of customers and prospects based on their profit potential as they pass through the various stages of the prospect/customer lifecycle. Whether it’s a direct mail piece or any other part of your marketing mix, it’s easy to see why you wouldn’t want to speak to your best customers with the same message you use for your prospects or speak to a former customer with the same message you would use for a new customer. Having a range of targeted marketing materials can significantly increase the ROI of your marketing efforts. And with today’s database and print technologies, it’s never been easier.

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