LTV is meant to gauge the long-term value of customers, enabling marketers to shape their campaign strategies for those who are most valuable to the business. However, like any tool, LTV possesses its own set of limitations.
A Spotlight on LTV
First, let’s clarify what we mean by lifetime value.
Lifetime value (LTV) – which is sometimes used interchangeably with Customer Lifetime Value (CLV) –is a strategic metric used to assess the economic worth of a customer over time. It quantifies the total revenue a customer is expected to generate, factoring in variables such as purchase history, average spend, retention rates and the number of years a customer can be expected to engage with a brand.
In theory, LTV enables organizations to prioritize their marketing efforts and resources toward their most valuable customers, thereby optimizing return on investment.
LTV is used in CRM and customer marketing in a number of ways:
- Strategic decision-making: LTV empowers businesses to make informed decisions regarding resource allocation, product development, customer acquisition strategies and more. By identifying and nurturing high-value customers, organisations can focus on initiatives that yield the greatest ROI.
- Segmentation and personalisation: By segmenting customers based on LTV, marketers can craft targeted messaging and promotions that resonate with each segment’s needs.
- Success metrics: If executed and measured correctly, customer marketing and CRM teams can use LTV as a way to demonstrate their impact on the business. Raising LTV across segments is a common goal for marketers looking to deliver value.
Limitations of LTV
LTV has its uses, but it also has many limitations:
- It doesn’t take into account that customer behaviour can be influenced. In essence, it denies the very idea that marketing works.
- It’s rooted in the past. Even though it’s meant to be indicative of the future revenue a customer might generate during the relationship with your brand, traditional LTV only uses past margins, costs, purchase behaviours, retention rates, etc. to calculate it.
- It conflates LTV with value to the business. Relying solely on LTV likely neglects the potential of customers with lower LTV who may have higher growth potential in the future.
- It disregards non-transactional customer behaviours. LTV calculations often revolve around transactional data, neglecting crucial aspects of customer interactions, such as campaign engagement, brand advocacy, referrals, product reviews and more. Overemphasizing LTV can hinder organisations from nurturing valuable customer relationships beyond monetary contributions.
- It lacks individual context. LTV is a metric of averages. It lacks nuance and treats every customer within a given LTV band the same.
A Way Forward
With this in mind, marketers need a tool that enables strategic decision-making, segmentation, personalisation and success measurement without the drawbacks. Future Value Modelling is Planning-inc’s solution to this problem.
Planning-inc’s Future Value Model (FVM) establishes the true current value and predicts the future value of each customer, then identifies the behaviours that will increase that value over a specific period of time. It’s forward-looking, actionable, holistic and nuanced, taking into account a wide array of customer behaviours and “value” definitions.
FVM enables marketers to track and influence customers’ value trajectories, create effective segmentation strategies, optimise marketing spend, anticipate churn and more.