Why Firms Don't Care About LTV

Jim Novo asks (and answers) the question:

Why don’t firms care about customer lifetime value?

Jim asserts that there are fundamental reasons why companies don’t take a longer-term view in respect to their marketing programs including:

  • Business culture — where performance rewards are tied to short-term goals.
  • Nobody in charge — no one has full-time responsibility for customer productivity or retention.
  • Lack of desperation — firms just not feeling the pain (yet).

My take: I agree with Jim 100% — but I think the fundamental reasons go further. The even more fundamental reason is religion. Thesaurus.com defines religion as “a specific fundamental set of beliefs and practices generally agreed upon by a number of persons.”

For my money, the reason that LTV hasn’t taken hold in many firms is that the marketers in charge have a fundamentally different set of beliefs. This is the essence of marketing civil’s war — the branding religion is currently the predominant religion.

The missionaries may very well be right — LTV may be the one right way, and a superior way of (marketing) life. But for now, they’re preaching to the choir, and trying to convert the heathen.

Look at the state of “customer engagement.” A year ago the ARF defined engagement as “turning on a prospect to a brand idea enhanced by the surrounding context.” There are far more articles about how engagement is about how much time someone spends interacting with an ad than how engagement could be about engaging with the product or service itself.

In my presentation today at Epsilon’s customer symposium, as I was discussing customer engagement (a series of interactions that strengthen a customer’s emotional connection to a firm), you’d think that many direct marketers had never even heard the term before.

Culture, responsibilities, and economic conditions all definitely play a role. But below that surface are religious differences in marketing theory.

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5 thoughts on “Why Firms Don't Care About LTV

  1. I think customer value gets the “talk to the hand” treatment because too many executives see it as an obtuse algebra equation. If they would look at it as a guide to their company’s activities, and looked at it more as a concept than a math problem, we would hear a lot more useful examples of applying the long-term view.

  2. My take is the same as Jim’s. Marketing managers are trained in branding, positioning, etc. They do not understand the bottom line as well as they should. That’s why the average CMO tenure is only 18 months.

    They only confuse B2C marketing with B2B marketing. LTV matters less in B2C, than in B2B. And most marketers and ad agencies are training using B2C stategies and tactics. Religion is not a bad analogy to this. Let’s hope the move to online, creates new branches of religion.

  3. I agree it’s pretty much a religious matter, in the sense that businesspeople (not just marketers) simply don’t see LTV as relevant to their needs. But the difference is, religious matters are ultimately unproveable, while LTV can be demonstrated logically and mathematically to lead to better outcomes. So we shouldn’t just throw up our hands and give up on LTV, but rather figure out how to change people’s minds so they understand why it’s worthwhile.

  4. John and David — your comments are unintentionally intertwined. As you stated, John, it’s viewed as an “algebra problem” — which means that it might as well be rocket science as far as most execs w/o the background in statistics and math are concerned. Which in turn means, David, that although it may be provable, it doesn’t matter, because they don’t understand the science behind it.

    And Fred (thank you for commenting) — I think a new branch of the religion has already been developing (maybe you’ve heard of the Webanalyticians, led by the High Priest Eric T The First?). But I’d like to know why you believe “LTV matters less in B2C than in B2B”?

  5. I realize you can make LTV as complex as you want to, but (in line with John’s comment on “concept” above), what’s wrong with:

    Annual Revenues / Number of Customers = Annual Rev per Customer

    Annual Rev per Customer x Operating Margin % (or EBIT %, Cash Flow %, whatever Finance / Wall Street likes to use for the Industry) = Annual Margin per Customer

    Annual Margin per Customer x Number of Years a Customer = LTV

    Conceptually, that’s all there is.

    Then:

    * Tweak numbers by customer segment

    * Refine definition of a “customer”, if needed – do they have to generate revenue during the measurement period to be a customer?

    Is that simple enough to get started on something?

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