Years ago (at the risk of dating myself), there was a great debate in the catalog industry on how to calculate customer lifetime value (LTV). Heavy hitters weighed in with formulas that measured, projected, and/or weighted the numbers.
Most of them required a team of statisticians to run the numbers. In reality, even if you had the team, you probably wouldn’t get a consensus. You would get to participate in a lot of boring meeting where they argued over which data to use.
The term “lifetime value” implies that once a customer has purchased, they have committed to a long-term relationship. The reality is that a customer’s life expectancy is dependant on merchandise and lifestyle rather than the customer’s actual lifetime.
Companies with products like maternity clothes know that their customer base must evolve quickly because the lifespan is short. It is part of their business model and key to their success. It is less obvious, but most companies will find that their customers have a consistent lifespan.
Every company should know their customers’ life expectancy. A complete business intelligence analysis will define lifespan by customer profile. Some customers will purchase one time only. Some will purchase for a period, stop for a while, and then return. Others will make several purchases over weeks or years and then disappear forever. The ability to anticipate the pattern and apply it to your marketing plan reduces costs and increases return.
To calculate the lifetime value, you have to know the expected lifespan. Otherwise, your information is missing a key component. And, you will continue marketing to customers who are trying to rest in peace.
Not cool…
