It's a marketing truism: Higher buying rates and lower service costs make long-term customers more valuable. That, of course, influences what companies spend on customer acquisition and retention. But according to an August 2001 working paper titled “Customers as Assets,” by Sunil Gupta and Donald R. Lehmann of Columbia Business School, Columbia University, customer-lifetime-value metrics can and should inform many business decisions in the marketing realm and beyond. In fact, looking at management decisions through the lens of customer value can generate surprising new perspectives — and often overturn conventional wisdom.According to the paper's authors, any calculation of customer-lifetime value (LV) must take three factors into account: margin (the annual revenue that customers generate minus the operating expenses a company incurs in serving them), retention rate (the percentage of customers expected to keep doing business with the company) and discount rate (the current cost of capital). The resulting dollar figure can yield a variety of insights.Firing Customers. Many companies use revenue growth and market share as key measures of success. But the LV perspective shows that this growth may come at a significant cost. Specifically, the cost to generate revenue and growth varies dramatically across customers.
