Balance of short-term and long-term marketing objectives
Because the full customer lifetime value calculation utilizes an appropriate discount rate, CLV is a marketing metric, which provides a balance between short-term and long-term marketing goals. This is because the discount rate converts future customer profitability into present value profitability – making it easy to directly compare cash flows (customer revenue and costs) at different time periods.
Therefore, if a marketer looks to maximize customer lifetime value (CLV) then by doing so they will also ensure that they have an appropriate balance between a short and long-term view. This allows the marketer to prioritize various marketing activities and investments based upon the best financial return over time.
Marketing budgeting decisions
One of the challenges for marketers is to determine an appropriate marketing budget. By calculating customer’s lifetime value, the firm can then determine an appropriate budget for various marketing costs in a per customer basis.
The customer lifetime formula is quite helpful when selecting between different marketing objectives and programs, particularly if the firm is interested in maximizing its marketing ROI. What is the best allocation of the marketing budget? Should marketing be focused on customer acquisition, customer retention, or increasing share of customer? What value is there in trying to leverage word-of-mouth?
An effective way to answer these marketing budget questions is to utilize the strength of the customer lifetime Excel template available on this site is to scenario test different marketing programs.
For example, if the company was able to create a more cost effective acquisition program (and reduce average customer acquisition costs), then what impact that they have on customer lifetime value? This outcome could then be compared against the financial outcome of investing the same marketing energy and programs into increase customer loyalty (the lifetime of the customer). By scenario testing customer lifetime values, then a marketing budget can be structured according to the best marketing ROI return.
The company’s history of customer profitability analysis provides an excellent input into creating reliable scenario tests for customer lifetime value purposes.