LIM College

Customer Lifetime Value “CLV” and why it matters

The constant flurry of news emanating from Amazon about fashion and appliances, Prime Day results and the Whole Food acquisition triggers the concept and value of Customer Lifetime Value (CLV). In a consumer-centric worldview, customers are not intangible assets on the balance sheet, but rather real assets dynamically valued reflecting new data collected daily.

What Isn’t Counted Doesn’t Count!

Bottled water at the door, children’s playrooms in the rear, even the surprise and delight of winning a free trip to Tahiti, doesn’t create customer lifetime value, which in turn is foundational to any firm or corporate value. “None of these tactics have value unless you value them, that you know the value of the customer before and after the campaign,” says Wharton’s marketing professor, Peter Fader, an expert in this area. Too often, marketers only loosely capture the ROI (return on investment) of marketing spend. Fader’s message is to take the best practices of accountants, bankers and financial professionals and project future cash flows and discount them back to today. He says, math and pesky numbers are key to unlocking consumer and corporate value.

The disruption occurring in consumer businesses reflects the rapid and accelerating transition from product centricity to consumer centricity. In the former, CPG companies are forever chasing the next big thing, a best seller, a product that can “comp the comp.” This strategy, even when successful, leaves too much value on the table. Fader believes the success of product strategy has plateaued reflecting product commoditization due to the forces of technology, smarter customers and nimbler competitors. He says tagging and tracking customer data will yield a wealth of insight. It will also change the nature of new product development from an end in itself to become a bait to lure in new customers and enhance CLV for existing customers. Ultimately, products should be created in service to the consumer and the creation of customer centric value.

In a consumer-centric worldview, customers are not intangible assets on the balance sheet, but rather real assets dynamically valued reflecting new data collected daily. This changes the way marketing expenses flow through financial statements, allowing for capitalization versus immediate expensing. Both have the same impact on cash flow, but capitalization reduces the immediate hit to profitability on the income statement. This approach could be a game changer for public companies. 

For additional insights from Professor Fader, visit http://whr.tn/CorpValPaper1 & http://whr.tn/CorpValPaper2 and his video interview: https://youtu.be/QHQo606fgxQ)

 (This is an excerpt of a longer article, original published at The Robin Report http://www.therobinreport.com/customer-lifetime-value/)