CLV and Limited Capacity

Customer Lifetime Value (CLV) is a great thing to calculate. It encourages marketers to take the numbers seriously. It helps finance people see the numerical basis of marketing. Calculating CLV encourages you to treat customers well; they are valuable and you have the numbers to prove it. Finally marketing’s influence probably increases when people think of a firm’s value as the sum of the values of its customers. (A little simplistic but the general idea is powerful.)

One of the most important uses for CLV is to provide an upper limit on how much you should pay to recruit a customer. Ignoring complications, such as network goods, if a customer lifetime value is projected to be $100 it doesn’t make sense to spend $101 acquiring the customer. That said as with any calculation you need to understand the details and think through what you are doing and why.

Marketers often describe CLV as the amount you should be willing to pay to recruit a customer but this isn’t always true. This assumes that your ability to recruit customers constrains your success, implying that you have unlimited capacity to serve customers. This may be true but is not necessarily so. Imagine marketing an apartment block. Once all the apartments are full acquiring more customers isn’t worth anything. As my MBA professor says, “ cannot always rely on CLV to be the firm’s maximum willingness to spend (WTS) to acquire (retain) the customer relationship.” (Pfeifer and Ovchinnikov 2011).

When using any marketing calculation question your assumptions and think through what you are doing. It is not enough simply to calculate the numbers, you really must understanding why you are doing the calculation.

Read: Phillip E. Pfeifer and Anton Ovchinnikov 2011 A Note On Willingness To Spend And Customer Lifetime Value For Firms With Limited Capacity, Journal of Interactive Marketing, 25, Pages 178-189