Re: Evaluating a customer's lifetime value

From: Ed Strong <bigfoot_at_mailhost.tcs.tulane.edu>
Date: Wed 12 Apr 2000 10:34:55 -0500

LARRY RAUBACH WROTE:
> when one determines lfetime value, should some form of
> subjective, or otherwise, figure be also used to
> reflect the spin-ooff benefits a company wil likely
> realize due to this "lifetime customer" speaking highly
> of the company to family, friends and associates over
> the years?

I guess you could call this a "contagion" factor...does
the lifetime customer have an economic value to the
firm beyond the stream of revenue from his patronage?

There is a tremendous temptation to figure some kind of
number...how many additional customers does he bring to
the site, what is their level of buying, etc...that
shows what this customer is worth to the business. In
the end, however, it becomes a little like a pyramid
scheme. It is customary, for example, to estimate total
expenditures by tourists based on the room rental tax
receipts from hotels/motels because the only absolutely
measureable number we have is tax receipts. But the
extrapolation to total tourist expenditures in a
locality requires some huge leaps of faith, or at least
confidence that the number is full of uncertainty.

I would vote to keep the accounting separate. Report
the value of the "lifetime customer" separately from a
value for the "contagion" they represent. That way
managers evaluating the numbers can tell what's what.
_______________
Ed Strong
A. B. Freeman School of Business
Tulane University
New Orleans, LA 70118-5669
http://ocw.abf.tulane.edu





Received on Wed Apr 12 2000 - 10:34:55 CDT