Happy, repeat customers have been important to vendors since the beginning of commerce. But the idea that a customer has a quantifiable lifetime value (LTV) first became a significant business consideration in the magazine industry, as publishers tried to make financial projections based on the continuing stream of revenue that a customer's ongoing subscription represented.
LTV could be estimated relatively simply by multiplying the price of the subscription by the number of subscription periods that a customer would likely remain a subscriber while subtracting the costs incurred to acquire the customer and to publish and deliver the magazine. For subscription businesses, this sort of simplistic calculation is still the easiest way to begin thinking about LTV.
Subscription businesses are more complicated today, of course. Let's say one of your favorite new movies is now streaming on Prime, and while you do have a Netflix subscription, Netflix doesn't have this movie (yet). So you sign up with Prime, and for the next few months, you're hooked. No big deal, right?
But what are you actually worth to Prime? Might you also decide to purchase additional Prime items? What might your new relationship with Prime mean for your value to Netflix? How likely would it be to influence one of your friends or relatives to sign up for Prime? And from the standpoint of the companies selling you these services, how should they approach their next interaction with you so as to maximize the value you might have for them?
In today's always-connected, data-saturated economic system, subscription business models have become the mainstay beyond just magazines and streaming video services. Ubiquitous interactivity and advanced technologies have given every business today a reason to think of its customers in terms of their continuing streams of revenue rather than their individual, one-and-done purchases.
I've led and founded companies in the customer strategy field that have used some of the latest technologies, and in my discussions and experience working with one of the foremost customer experience experts, Don Peppers, I've found that choices, availability, ease of access and ever-more-rapid home delivery characterize the new norm of consumerism, while cloud-based products and "everything as a service" have rapidly become not just viable B2C business models, but dominant B2B marketing strategies. According to predictions by Gartner, Inc., virtually all new entrants and 80% of existing vendors will offer some form of a subscription-based business model by 2020.
As a result, customer LTVs are taking on an entirely new significance for nearly every vendor. Companies in every category today are paying closer attention to the financial costs of attracting and acquiring new customers while estimating the overall financial benefit of providing the kind of higher-quality customer experience that will earn each customer's loyalty and longevity. For today's companies, it's no longer enough to think of a customer as simply an anonymous member of a market population. Rather, each customer must be viewed as a discrete and individually motivated human being.
In effect, a business should view every customer as a financial asset — perhaps the single most important kind of financial asset a business can have. In purely financial terms, a customer's LTV is the net present value of the future stream of cash flow attributable to that customer.
LTV, in other words, is no longer simply a direct marketing metric favored by magazine publishers, direct mail houses and home shopping channel vendors. It has become a vital financial tool with which a company can manage the ongoing, individual experiences of its customers in a manner designed to secure and improve its overall shareholder value going forward. LTV allows a company to try to optimize the mix of current and future costs and profits that will be attributable to each customer individually, and precisely because it is intrinsically linked to profitability and sustainable growth, LTV represents the very financial lifeblood of any business organization trying to succeed in today's 24/7 digital world.
Time For An Upgrade
Unfortunately, the kind of thinking that goes on at many companies about lifetime value is not yet fully up to this task because most notions are still based on the old idea that LTV is just a static, unchanging metric to quantify the customer's value to a business.
But while this may have been a reasonable financial shortcut in the pre-digital age, the truth is that LTV wasn't then and isn't now a single, unchanging metric, defining some sort of established, constant value of a customer. As customers' experiences change, as their lives progress, as the contextual environment changes, their LTV is constantly changing as well. And because customers' experiences, lives and thinking are always in flux, their LTV is always in flux, too.
The truth is, every customer is like a bundle of future cash flow with a memory, and it's your customer's memory that provides the strongest link between your company's current-period cash flow and its long-term shareholder value. The better a customer's memory of their experience with you is, the more future cash flow they will likely generate — and vice versa.
LTV is not static, and it is the change in a customer's LTV that businesses will find most useful for analyzing their own customer-facing activities. When a company implements a marketing program that results in improving a customer's loyalty, for instance, the financial value that the program creates can only be adequately represented as an increase in that customer's LTV. But by how much does LTV increase, and is that enough to offset the cost of the initiative?
Today's business organizations need to calibrate their actions continuously for every customer, using the likely ups and downs of that customer's LTV to optimize their interaction strategy for that customer, constantly balancing short-term costs and revenues against the longer-term value created (or destroyed). Companies must reimagine LTV in a different paradigm altogether in order to maximize its impact, and in my next article, I will introduce this new paradigm, "streaming lifetime value," and discuss how businesses can take advantage of it.
