Why the Customer Lifetime Value Can Be a Risk

The Customer Lifetime Value is a concept that is getting increasingly popular. Be guided solely by the CLV can be dangerous for an SME.

To calculate the CPL is necessary to know the conversion ratio of contacts to customers and profit I get through a purchase. The Customer Lifetime Value is an optimistic concept that allows us to make up our Excel forecasts.

The theory behind the CLV says we capture a customer will repeat purchase. This is a hypothesis that if we do things well it can be successful. Some factors, not to use the Customer Lifetime Value wrongly must be considered.

Customer Lifetime Value Can Be a Risk

Customers captured with very aggressive offers no repeat purchase

Marketing campaigns with very aggressive offers and discounts can be very successful. Many companies do not see beyond this peak revenue. Typically the client that is not necessarily attracts the most faithful. It costs them a lot more loyal to not say it’s impossible. Whenever there is a better deal you will lie with another. If you have a business that focuses much for such campaigns apply to the calculation of CLV CPL may lead to overpaying for contacting a potential customer.

The money you have in your account today has the same value as the morning you enter

The CLV as the name suggests, you consider the value that a customer throughout his life. Therefore, it is not the same the euro we already have in our bank account than that which we will collect within 2 years. You have to perform a calculation of discounted cash flows for the actual value of the benefit we get from a customer within a period of time x.

The CLV ignores cash flow

Another danger is the use of CLV is that disregards the cash flow of a company. Especially if you are an SME or start-up your survival depends on the balance of your bank accounts. Every month you have to pay rent, salaries, employees, suppliers, etc. Say your CLV are 100 euros. According to our calculations, we could spend up to 25 euros in acquiring a new customer and 2.50 euros in the lead.

Let’s say that this client will cost 20 euros on the acquisition, but on the first sale only 15 euros are spent. How you have the cost of advertising you have to do effective immediately lose 5 euros in your box. Although throughout his life will generate positive short benefits will generate a small hole. If you multiply the effect by 100 or 1000 and do not have a significant financial cushion, you can die quickly of success because you run out of oxygen.

In an SME or start-up more important than achieving customers or increase sales is to survive. For this cash flow must always be positive because typically there are no reserves to withstand long. Before looking at the CLV purely you have to look at the Excel and if the box holds investment to acquire new customers.

Albert Palacci is writing for several online magazines and websites, he is passionate about digital marketing and helping small businesses to grow, more about him you can find on his http://www.slideshare.net/albert-palacci or https://plus.google.com/+AlbertPalacci1.

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Albert Palacci occasionally writes as a technology journalist, he is also writing regularly for online magazines and websites.

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