The Importance of Customer Lifetime Value to Marketing

Customer Lifetime Value (CLV) is concerned with placing a value of an individual customer’s present value to a company in terms of cash flow.

There a several aspects that make valuing a customer a complicated matter….

Identifying which customers to invest in is tricky. What you may define as the ideal customer today may change quite quickly down the track (Kumar, 2018). Adjustments to customer portfolios that may make CLV measurements more accurate may not be cost effective but can be extremely time consuming (Kumar, 2018). In the nature of the modern competitive environment, competitive actions may not prioritise customer retention and make this difficult to do with bigger-picture strategy plans.

Kumar (2018) sums it up with 10 questions marketers can ask when assigning their customers with an economic value, in what I believe is a very effective tool to provide greater detail to measuring CLV in any market:

  1. Which customers should we select? How many do we need?
  2. What is the relationship between repeat purchase and profitability? Do loyal customers expect lower prices?
  3. How can we most effectively (and efficiently) communicate (interact) with different customers?
  4. How does cross-buying impact on organisational returns?
  5. What is the next product that they customer is likely to buy? When should we time an offer to existing customers?
  6. Can customer attrition be predicted/prevented/managed?
  7. What is the impact of product returns on long-term value?
  8. How do customers use the different marketing channels? Can we manage this?
  9. What is the relationship between brand building activities and CLV?
  10. What is the relationship between customer retention and acquisition? When, how, and which new customers should we attempt to ‘acquire’?


Kumar, V (2018) “A theory of customer valuation: Concepts, metrics, strategy, and implementation” Journal of Marketing, 82 (January), 1-19.


Marketing Using ‘Customer Lifetime Value’ & ‘Customer Equity’

In the previous blog, customer profit was discussed which is relevant to the past tense of customer’s behaviour. Customer Lifetime Value (CLV) is concerned with “the present value of the future cash flows attributed to the customer relationship” (Bendle et al., 2016, p159).

Essentially, by gathering information about a customer’s behaviours we can reflect on the information and cash flows associated with the customer to provide an insight and estimation of the future value they might bring to the company.

Calculating CLV becomes extremely simple in contractual situations given the predetermined nature of the contract’s agreements but can provide a good element to planning for future cash flow.

The difference between CLV and Customer Equity (CE) is that CLV is concerned with a customer on an individual level while CE provides a measurement of the value of all customers (Bendle et al., 2016).

CE is another element that can increase the accuracy of financial standings and would, at the bare minimum, compliment the current processes in nearly any organisation.


Bendle, NT, PW Farris, PE Pfeifer & DJ Reibstein (2016) Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, 3rd edition. Pearson: New Jersey

A Marketing View of ‘Customer Profit’

It seems rather obvious and sometimes assumed…

Customers who result in more value for a company with less efforts and/or costs are far more desirable. Something many company’s fail to do is segment the customers based on the status or level, this allows them to be treated appropriately.

Bendle et al. (2016) categorises these categories into the following 3 tiers:

Top tier customers can be rewarded but this must be done carefully to prevent any impact on their status as a top-tier customer.

Second tier customers are the second category and these customers need to be nurtured and grown which will undoubtedly take investment.

Third tier customers are undesirable and cost far more than their return in value and should not be chased by any means.

We can define Customer Profit (CP) as the ‘difference between the revenues earned from and the costs associated with the customer relationship during a specified period’ (Bendle et al. 2016).

This involves a large amount of guess work for two reasons on both sides of the equation. First, calculating the cost allocated to an individual customer is very hard to calculate but if a consistent method such as Bendle’s et al. (2016) Activity Based Costing can be applied, this will provide some useful data.

On the other side of the equation, calculating revenue is also difficult as the monetary revenue is one thing but if that customer recommends the brand to their friends this adds further value.

While theoretically, the concept of customer profit is very useful the application is very difficult and the practical uses for the concept seem to lie in the tiered status of customers to allocate resources appropriately.


Bendle, NT, PW Farris, PE Pfeifer & DJ Reibstein (2016) Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, 3rd edition. Pearson: New Jersey

A Marketing View of Customers, Recency and Retention

When making any measurements to help improve performance, the first step of defining what you are measuring is not always as easy as it may seem. A customer is something that we all know but don’t give much more thought about defining it.

Bendle (et al. 2016) defines customers as the number of people who buy from the organisation within a specified timeframe. The time frame can be adjusted based on the goals of what you are trying to measure. For some businesses, it can become increasingly difficult as to what level to define the customer at i.e. household, individual or contracts.

Some businesses may also count their customers in different ways, this may be per visit or per transaction depending on what is chosen as the defined customer. They key for success is to stick to the definition and avoid double counting to skew results.

Recency is the length of time since the customer’s last purchase (Bendle et al., 2016). When looking at defining recent and/or current customers, it is relevant to the product and the market. FMCG customers would have a completely different purchasing behaviour to a car yard… This metric allows an organisation to know how many customers they currently have.

Retention rate is the ratio of customers retained to the number of customers at risk (Bendle et al., 2016). The essence of this is identifying the number of existing customers who continue to be customers, a perfect example is any customer who renews a subscription or membership to a product or service.


Bendle, NT, PW Farris, PE Pfeifer & DJ Reibstein (2016) Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, 3rd edition. Pearson: New Jersey

Critical Success Factors for Marketers

Critical success factors are identified by McDonald et al. (2014) as factors that represent important customer needs. Unlike qualifying factors, these are not expected to simply survive but they are really important to the target market.

Improvement on areas identified as critical success factors result in gaining a competitive advantage in the market, the flow on effect from this is an increase in market share. Marketers need to fully understand the critical success factors in their target markets and be able to track the performance of their (and ideally their competitors’) market offerings appropriately (McDonald et al. 2014).

When identifying critical success factors, McDonald et al. (2014) identifies some areas to consider:

  • Consumer needs that are met and unfulfilled
  • The varying importance of the critical success factors
  • Expected performance levels and how well company is meeting them
  • Performance in comparison to competitors
  • Customer perception and points of competitive advantage

To put it simply, McDonald et al. (2014) summarises critical success factors as ‘winning through differentiation against key competitors’. There are some steps that can be be taken by marketers when it comes to using critical success factors:

  1. Provide a clear description
  2. Identify relevant metrics (measurements)
  3. Identify where information comes for these metrics
  4. Rank CSF in order of importance
  5. Identify current performance
  6. Set a SMART goal for improvement
  7. Know the benchmark set by competitor in the market

McDonald, Malcolm, Peter Mouncey & Stan Maklan (2014) Marketing Value Metrics: A new metrics model to measure marketing effectiveness. Kogan Page: London.

Qualifying Factors for a Marketer Meeting Customer Needs

When assessing what is seen as a qualifying factor, it must first be defined. McDonald et al. (2014) defines it as the factors customers expect to be delivered by all organisations in the market. It is looked at as the bare minimum to survive in a market.

Qualifying factors are required to deliver value for the customers. Marketers should look to determine what the threshold is for customers as to not exceed this by significant amounts. The reason being that exceeding this qualifying factor threshold may not hold much, if any return on investment for an organisation.

The purpose here can be seen as reducing dissatisfaction instead of increasing satisfaction as that is more of a measure for critical success factors.

This is a dynamic measurement and a method that can constantly measure the expected and achieved performance levels in an organisation is required to address and gaps in the expected results.

To enhance the accuracy of these measurements/factors, a clearly identified target market is also required and a pre-determined threshold for the gap of expected and achieved performance levels must also be established. This allows definitive actions to take place and a specific time and removes any delay in the decision process.


McDonald, Malcolm, Peter Mouncey & Stan Maklan (2014) Marketing Value Metrics: A new metrics model to measure marketing effectiveness. Kogan Page: London.

Marketing Metrics for Customer Feedback

Customer feedback is essentially their perception of the product or service you offered, it can be influenced by their expectations but the measurement is taken proceed their consumption of your offering.

These metrics indicate how happy the customer was with the organisation’s market offering. Bendle (et al. 2016) include customer satisfaction, willingness to recommend, net promoter score in their customer feedback metrics.

Customer Satisfaction

Is expressed as a percentage that reflects how many customers had their expectations exceeding the pre-determined satisfaction goals (Bendle et al. 2016). A high satisfaction percentage can be a good indication of future purchase while any dissatisfaction may bring to light issues that may need to be addressed. There can be some issues with accuracy as there is with any survey data.

Willingness to Recommend

As it may sound, this metric reflects the customers who indicate they would recommend the product/service to family of friends and is collected through survey data (Bendle et al. 2016). It is hard to measure the flow on effect but it does reflect a higher level of loyalty and word-of-mouth marketing can be extremely effective.

Net Promoter Score (NPS)

This is an additional means of measuring willingness to recommend. This is a relatively simple means that compares the scores of respondents with 9-10 in contrast with those scoring 6 or below to come out with a net score. The end percentage, if positive reflects a good level of satisfaction but 0% can simply mean equal advocates and negative respondents. The other flaw to this measure is the inability to indicate causes of poor satisfaction and simply diagnoses when it occurs (Bendle et al. 2016).


Bendle, NT, PW Farris, PE Pfeifer & DJ Reibstein (2016) Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, 3rd edition. Pearson: New Jersey

The Importance of Loyalty in Marketing Metrics

Bendle (et al. 2016) looks at loyalty as being more of a broad concept then a specific metric marketers seek to measure.

There are some key metrics that must be considered when attempting to measure loyalty. These include share of requirements, willingness to pay a premium, willingness to search, repurchases and purchase frequency (Bendle et al. 2016.

Loyalty is important as an indicator for future business and the higher the level of loyalty is a reflection that the company will be likely to receive future revenue from this customer. Bendle (et al. 2016) raises the dynamic nature of loyalty and given the highly competitive nature of most markets now, if a company fails to meet the changing needs of their customers, the new entrants are constantly evolving to threaten customer loyalty.

Willingness to search is considered the ‘acid test’ for loyalty but to accurately collect the data to build this metric can be difficult. It is defined as the percentage of customers who would wait to buy a brand that is (temporarily) unavailable rather than buy an alternative brand. This could involve the customer going through a different medium to purchase their preferred brand or purchasing the minimum amount of their lesser preferred brand until they can again access their preference.

Loyalty is a key aspect for marketers to consider when measuring the success of their brand, a high level of loyalty in customers can be a great indicator for a sustained competitive advantage and future success. Marketers must always ensure they are meeting their customer’s needs as the threat of a substitute or new entrant are constantly evolving in the competitive environment that exists in most markets today.


Bendle, NT, PW Farris, PE Pfeifer & DJ Reibstein (2016) Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, 3rd edition. Pearson: New Jersey

Key Marketing Metrics for Awareness

As previously discussed on the blog, metrics can be used to measure just about anything, or at least attempt to. Bendle’s work identifies four main metrics that are used to measure the idea of awareness and the method of collecting all of them is through the quantitative means of surveys.


Is the most common term and an umbrella term for the whole area or marketing metrics. This is regarding whether the customer has ever heard of the brand or if they know it exists. It is crucial as you will provide different offerings to someone who has never heard of your brand compared to a 10-year loyal customer.

Top of Mind

This metric attempts to measure how relevant the brand is to the target market, an example would be surveying the first thought of grocery shops and if the response is Woolworths, they are the brand that is ‘top of mind’ for that customer. When data is collected from a whole target market a clear picture can be painted about competitors and where you may stand amongst the competition. This metric is however criticised as the measurement is often influenced by the most recent brand interaction and perhaps not their preferred choice.

Ad Awareness

This seeks to measure performance of marketing efforts around a specific ad. It is most commonly measured as a percentage of the targeted population to help improve future marketing efforts by identifying what aspects may have worked best.


Bendle states this as not being a formal metric but it still remains an important aspect that measures a deeper level of awareness. This metric seeks to measure the customers knowledge beyond just the name or any surface informations. It can be a useful metric to see if a company vision statement or CSR efforts are being communicated around a market.


Bendle, NT, PW Farris, PE Pfeifer & DJ Reibstein (2016) Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, 3rd edition. Pearson: New Jersey

The Risks of Poor Strategy for Marketers in a New

To put it simply, these risks occur when the promise of a strategy does not deliver as it is planned prior to implementation. McDonald (et al. 2014) categorises the major concern into five areas.

Target Market Risk

This can be caused as a result of poor research or poor segmentation and increases in the likelihood of occurring if the target market is not homogenous or doesn’t have a key common characteristic.

The risk is that the target market is wrongly identified and understood and the offering wither doesn’t reach this segment or is not offered the product/service correctly.

Proposition Risk

This is the risk of your offering not being purchased due to being poorly communicated or being a service/product with little to no demand.

This risk can be reduced by offering a differentiated product to different segments as opposed to one mass offering that may come across as too generic for a consumer to proceed to purchase.


This is an analysis tool that identifies the companies Strengths and Weaknesses as well as the external Opportunities and Threats. If this is done poorly, the risk is that the company may offer a product that doesn’t utilise a strength or it may miss an opportunity.

A thorough analysis can reduce the risk of a strategy by correctly seeing the best area to enter a market by utilising organisational strengths.

Uniqueness Risk

Similar to proposition risk, but if the strategy is similar to a direct competitor, there is an increase risk of failure or reduced profit margin. This applies to the product as well, there must be some differentiating factor to make the product stand out from the rest to minimise the risk of strategy not being as successful.

Future Risk

The risk that your strategy fails to take into account the trends in the market. While it can be impossible to predict the future trends to 100% accuracy, research can allow a strategy to identify potential risks and opportunities that may arise and allow room to adapt to these. This can be the key to gaining and sustainable competitive advantage.


McDonald, Malcolm, Peter Mouncey & Stan Maklan (2014) Marketing Value Metrics: A new metrics model to measure marketing effectiveness. Kogan Page: London.