On the Use of Customer Lifetime Value As a Limit on Acquisition Spending

The concept of the lifetime value of a customer is well established in the theory and practice of database marketing. The lifetime value of a customer, defined to be the expected present value of the net cash flows from the firm’s relationship with the customer over his or her lifetime, is often used as an upper limit on spending to acquire the customer. If the expected cash flows from the relationship with the acquired customer have a present value of $100, then the firm should spend no more than $100 to acquire that customer. The purpose of this paper is to examine carefully this use of customer lifetime value. While the $100 lifetime value of the acquired customer is one important factor in the acquisition decision, it need not be the only factor. This paper will offer several examples where acquiring a customer can affect (either positively or negatively) the firm’s relationship with its other customers and/or prospects. In other words, sometimes the acquisition of a customer affects the lifetime values of the firm’s other customers and prospects. In those situations, the firm must account for these higher order effects when setting a limit on acquisition spending. Phillip E. Pfeifer Darden School 100 Darden Boulevard Charlottesville, VA 22903 [email protected] Journal of Database Marketing, 7(1), 81-86, 1999. Please do not quote or copy without permission.