On customer lifetime value: I would laugh if I was not crying

I remember the incident as if it was yesterday.  It was the first term of the first year of my degree in Applied Physics.  One of my physics professors took the time to point out a huge mistake I had made in answering one of the questions.  It was a mathematical question and I had used a calculator and thus had written the answer to 6 or so decimal places(xxxx.xxxxxx). I wanted to show off my accuracy, my precision!

Being a benevolent fellow this physics professor asked me to estimate the accuracy of each variable that went into the calculation.  It turned out that the accuracy was typically x plus or minus 5%.  Given that there were four or so variables, my physics professor pointed out that I should have simply given an answer to the nearest thousand – leaving out the decimal places as they gave a misleading impression of certainty, of accuracy, that simple was not there.

This is my first issue with all the people who are fixated on calculating the customer LTV and spending a lot of time and money to do it.  If you were calculating that for me – your customer – what would you need to figure out?  Which products I am going to buy?  How many I am going to buy?  When I am going to buy?  How often I am going to buy?  How I am going to pay?  What the margin is on each of the purchases I make?  What it will cost to serve me?  What discount rate to use to discount future cash flows into todays money to arrive at a Net Present Value?

So here is the question my benevolent physics professor would ask?  How can you possibly work out these variables with any accuracy?  How can you possibly come up with an answer that you can count on, you can rely on?  You have to make so many assumptions that the answer depends radically on your sense of optimism or pessimism than it does on facts on the ground.  In fact you create any answer you want to support any case that you want.

Put differently customer LTV is not written in stone.  It depends on what you do.  It depends on what your competitors do – including some that are not even on your radar.  It depends on the customer and her circumstances and tastes – and these evolve.  If you take chaos theory seriously – and you should as social media is everywhere – then the next Tweet could completely change your customers willingness to purchase from you.

Whilst this is a serious flaw, it is not the most important one.  The legions that are busy calculating a precise customer LTV have totally missed the central point of customer LTV.  This point is simply this: if you view the customer as being a customer for life then you are more likely to behave in a way that creates a customer for life.  How?  You are more likely to do the right thing for the customer: the right product, the right service, the right pricing, the right communications and above all the right attitude.  An attitude of lets collaborate so that we can both come out winners.

Put simply you can either make the assumption that I am only going to buy this one computer from you and treat me accordingly. Or you can assume that you have it in your power to treat me so well that I will buy a new computer from you every three years for the rest of my life.  And the assumption you make has a large impact on the future you create.

Is LTV important? Yes.  Do you have to spend a lot of time, effort and money to get at a precise figure? No.  Does making this effort result in the right kind of attitude – the kind of attitude that creates customers for life? Highly unlikely.

If you disagree then please write and correct my misunderstanding.

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