Total Customer Value
Overview
Total Customer Value is usually taken to be the difference of two quantities.
{% Total \, Customer \, Value = Lifetime \, Value - Customer Acquisition Costs %}
- Customer Lifetime Value (LTV):
represents the total discounted value of having given customer to the firm. This includes all the value that accrues to
the firm over the liftime of the customer. This inherently means that for most firms and customers, the LTV is not
known for certain, that is, it is random to some degree, and many times cant be measured well due to the future nature
of the value.
- Customer Acquisition Costs (CAC)
- the amount of money spent to acquire a customer through ad buys and other marketing efforts.
For a customer to be profitable to the firm, the LTR value needs to be higher than the CAC. That is, we want either LTR - CAC > 0,
measured as a ratio, we want
{% \frac{LTR}{CAC} > 1 %}
Challenges
It may be thought that when the total customer value is known and greater than the acquisition cost, that a company should continually
pay the customer acquistion cost to obtain new customers. However, there are complexities to this strategy.
- Inaccurate LTR/CAC estimates - the LCR/CAC ratio is an estimated value and hence
may be inaccurate. Careful market departments will try to measure the value in multiple ways and also to monitor
it over time. .
- Working Capital Managment
- the biggest challenge to capitalizing on a high LTR/CAC ratio is that customer
acquisition costs occur today, whereas the customer value only accrues over time. An aggressive company can
find itself having spent all its cash to acquire new customers and running out of money.
