There are many definitions of CLTV floating around, and even more views on how it should be used. We thought it might be useful to cast it open to discussion here after sowing some initial seeds...please feel free to weigh in with your perspective.
In our view, CLTV is an overrated metric for relationship management. Some practitioners purport that it is the way to differentiate customers for service, pricing, contact and offer management. Others promote the concept of "customer equity" which is closely related to CLTV. We respectfully disagree.
CLTV is only one metric among several that are useful for client management. Other values - current value, historical value, potential value, marginal contribution etc. - are useful for specific purposes as well.
CLTV is only one insight among several others that are useful for client management. We should be aware of customers propensity to defect from a product (and their total relationship), their propensity to respond to various offers, their communications channel and frequency preferences, and all kinds of psychographic and demographic information to help us be relevant and timely in our interactions.
CLTV is also notoriously hard to measure. Current value and historic value can be validated with relative ease. Projected future values necessarily include assumptions about retention, cross-selling, pricing and costs in the future, which introduce uncertainty into the math. The result is a "cone" of probable values that looks like a hurricane path map. Within the projected cone of possibilities, there is a wide range of potential outcomes...and we don't really know what will happen. Adding capital allocations (which are very crude in most organizations) and discounting to the present to create an "equity" value boils the uncertainly down into a simple statistic that is easy to work with, but potentially misleading.
So is CLTV a worthy pursuit ? We think so, especially as a way of figuring out appropriate business strategies for groups of customers which have different long term potentials for the business. In our view some of the more immediate metrics and other dimensions of information have more traction in the short term. No doubt many will disagree...I'd love to hear your thoughts.
