The Changing Customer Lifetime Value

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Customer lifetime value is a measure that estimates the potential profit from a customer over a period of time. It is computed based on past purchase behaviors combined with assumptions.

Marketers use the information to guide their marketing spend and campaign development. It is an informed approach to focus marketing effort on the right customers at the right time.

In computing the customer lifetime value, assumptions are made about margin, re-purchase behavior, the customer retention rate and retention period. These input parameters are based on a snapshot in time.

The market, however, is dynamic and customer behavior could change faster than anticipated. For example, customer preference could change as a result of lifestyle shift; profit could deteriorate due to competitive pricing. So, it is necessary to revisit the assumptions. Any major gaps would justify modifying the assumptions and recalculating the number.

In general, it is a good practice to challenge the assumptions embedded in the computation of your measures. Otherwise, you could be misinformed and end up taking actions that steer you off a tangent.

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