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Quest. The word conjures up trial, tribulation and the labor of Hercules to achieve a goal. In the best tradition of Arthurian legend, financial services direct marketing practitioners are in quest--not of the "holy" but of the "marketing grail."
Customer lifetime value. The notion of knowing how many dollars each of your customers contribute to overhead and profit is simple enough to grasp. The problem is, however, that too few financial services marketers are able to convince senior management, financial officers or parent companies that determining customer lifetime value is necessary nay, critical!--to the long-term financial health of their marketing operations.
Why so? Why so indeed. The major barriers to accepting and implementing the customer lifetime value concept are: communications, ignorance, denial, inertia and financial myopia.
Before exploring the barriers, let's take a look at some definitions. Customer lifetime value is the present value of a future stream of next contributions to overhead and profit.
In the long term, profitability is the result of two factors. First, the difference between the customer acquisition allowance developed using customer lifetime value and acquisition cost. Second, the volume of profit depends on the number of customers acquired at an acceptable investment cost, determined by their lifetime value.
The more customers you acquire means more customer sales. More sales mean more net contribution to overhead and profit you collect.
In the holistic view this means customer acquisition is a function of a related string of solicitation events, all of which taken together produce long-term profit at an acceptable return on investment.
Consider one critic of the lifetime value process.
F. Robert Dwyer writing in the autumn 1989 issue of the Journal Of Direct Marketing calls customer lifetime value calculations "an elaborate fiction of presumed precision."
While it is true there are no standard algorithms for the calculation of customer lifetime value in the financial services area nor, in fact, in any other business venue using the direct marketing concept, Dwyer is half right.
The problem of "presumed precision" is more one of application than it is one of calculation technique. The fundamental algorithms of business underpin all customer lifetime value calculations, including the well-known actuarial formula for PVFP (present value of future profit).
The "elaborate fiction" refers to...