Thursday, July 2, 2009


The customer lifetime value (CLTV) is a metric that is used by a number of companies to direct their marketing investments. BMW, the high end carmaker, uses the general formula of CLTV to direct their customer acquisition costs. leverages its customer data to accurately work out the value of its customer base.

These examples of companies using CLTV are few and certainly fewer in the Asian context. The main reason for that is that companies treat their marketing investments as short term investments. There are certain marketing investments which have an impact over a long period of time. Unfortunately, general accounting principles allow marketing investments to be treated as a short term expense, so there is a focus on their immediate payoffs.

There needs to be better communication between the finance and marketing departments to enable a long term view of such investments. Another important measure would be to quantify and express customer equity (the sum of the CLTVs of all the firm's customers) as an important intangible asset of the firm

Also it is important to note that all revenues because of the customer will not come from the customer. There will be other revenues because of word of mouth publicity, network effects, collateral advertising, etc. For example, an additional customer in Ebay does not pay Ebay directly but results in indirect revenues like commissions from sellers, ads, etc.

Using the CLTV concept, Pepsico recently concluded that Diet Pepsi, rather than regular Pepsi, is its number one soft drink.

Recently, mergers & acquisition dealmakers have relied on extending the concept of CLTV to value a customer base. It is rumored that CLTV based recalculations pushed Vodafone's valuation of Hutchison Essar from $10 billion to over $20 billion within a period of 6 months.

Working out multi-year impacts of marketing investments will not lead to an increase in marketing budgets but will lead to re-allocation of marketing expenditure based on the true value of the investments.

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