How to use Lifetime Value in a short-time environment

After the publication of my post last week, I was chided by several experienced marketers about neglecting to include an additional factor in my Customer Lifetime Value (CLV) calculation. What I did not include in my metric was the discounting of future cash flows, commonly called “Net Present Value.”

Net Present Value discounts future cash flows based on two factors: the first is the uncertainty inherent in predicting future revenue streams, and the second is recognizing that a discount rate should be applied to future revenue based on  the fact that you would not be able to invest that money until you received it.  This is commonly called “the Time Value of Money.”  So $100 next year would only be worth approximately $95 today, if you could earn 5% on the money this year.

However, in this extremely low interest rate environment today, you can argue that money received today has little investment value over a three-year time horizon.  So while I did err,  I do not believe that omission has significant impact on the calculation of lifetime customer value today.  But the NPV factor becomes more important as interest rates climb (as they surely will in the future).

CLV is inherently a long-term metric — it recognizes both immediate (this year) and longer term revenue adjusted for customer attrition and the time value of money.  The biggest question facing use of CLV is how to gain buy-in in a world where meeting the numbers this quarter and this year are challenging.  Since this economic environment is likely to continue with a slow improvement over time, marketers must “get creative” to keep the long-term vision of the forest from getting lost in the short-term trees.

Here are three “out of the box” approaches that can help marketers explain why CLV will help the company in the short-term as well:

1. Show that CLV growth equals growth in this year. Take a simple example — show how driving 1 more purchase from 1x buyers drives both revenue this year and in the future.  Easy to understand examples like this will help to increase buy-in.
2. Modify CLV to show next 12-month value. Some companies have had more success by adjusting the metric to show anticipated value in the next 12 months (on a rolling basis).  In this way, you build acceptance of the modeling approach while still addressing needs to demonstrate value in a reasonable time period.
3. Focus on relative value. Instead of highlighting the actual CLV number, show how certain customer segments, certain acquisition sources, programs or certain products perform relative to the average CLV for the customer base.  For example, if customers who come from a specific website have 20% higher CLV than the average, focus on the 120 index rather than the actual CLV number.  Use this index as one metric in evaluating marketing performance.

No time is better spent than on acquisition, retention and nurturing of high CLV customers.  But the time value of money only works if you have the time.  Modify CLV to make the time work for you and you can lead the way with a “quiet revolution.”

What other approaches have you used to gain buy-in to CLV?  How have you changed the metric to build support?