Non-customer and lapsed customers in CLV
The conversion of a non-customer to a customer marks the beginning of a customer relationship, as well as the commencement of revenues and costs (including incurred acquisition costs) associated with that customer.
We should recognize that a new customer to the brand/firm is generally a first time customer to the firm (or brand). That is, a customer who has never purchased the brand before. But there is also the possibility that a non-customer is a former (or lapsed) customer to the firm or brand.
As an example, consider a consumer who used to have a Samsung mobile phone, then switched to an Apple handset for the last three years, and now they have returned to purchasing Samsung again. The reality is, to Samsung, this customer was lost to a competitor and therefore should be considered as a non-customer prior to their re-engagement with the brand.
Therefore, in the customer lifetime value calculation, we should also consider the acquisition cost of re-winning lost/lapsed customers – as they become “new” customers for the brand again. In other words, the firm needs to re-acquire the consumer.
Lapsed Customer “Cut-off” Timing
Depending upon the industry, different time periods will be applied to determine when to classify an existing customer as “lost” to a competitor (or whether they have become a non-consumer of that product category). Therefore, where possible, the company’s database should attempt to classify customers accordingly.
The standard approach to this is to consider the “recency” of their last purchase, based upon the average purchase frequency for the firm and the particular product category – which may vary from six months to three years (longer for durable and higher cost products).