Understanding Net Present Value vs. Lifetime Value

Reading a LinkedIn article I came across the term Net Present Value (NPV). Wikipedia describes NPV as “the present value of money today compared to the present value of money in future, taking inflation and returns into account.” It’s However, I found the writer, Sallie Krawcheck’s, personal explanation more thought provoking: “the willingness to forgo earnings today, to invest smartly for more earnings tomorrow.”

Instead of applying to finances, economics and accounting, I started to think how NPV can be applied to marketing and customer relationship building. As marketers, we’ve been programmed to calculate something similar called a Customer’s Lifetime Value (LTV), the predicted net profit for the entire future relationship of the customer…but what about a prospect’s Net Present Value? Are they even worth acquiring? In the years to come, will they be worth more or less than they are right now?

In most cases, one optimistically assumes that a “new” customer relationship will grow, generate repeat sales, and increase in overall value. And of course, this can all be done with personal, frequent, and nurturing marketing communications. However, if we consider each specific customer’s net present value, their current worth and the stage of life when acquired… this may not be true. All new customers cannot be treated equally.

To get my point across, let’s make up a scenario… You’re a retail furniture store selling sofas to consumers within 3-mile radius of your store. You feel that you smartly marketed to consumers in your immediate service area, but could you have been smarter? You made two sales with your new customer offer: (Sale 1) Newlyweds purchase a sofa for their first home (Sale 2) a retiree purchases a sofa for his downsized assisted-living condo. The amount of money you profited on the sofa sales, your return on investment (ROI) for the mailing, was the same. Or was it…

Is a sale a sale? Would it have been better to forego the sale of the retiree’s couch for now, by smartly investing more marketing dollars into your list rental, refining your mailing list to segment by “age” or “stage of life”? In doing this, you would’ve quickly determined there is a higher likelihood of repeat furniture sales from younger, newlywed-like couples so your estimated earning potential, future profits, and ROI could potentially be higher.

And now that you’ve acquired these two new customers, moving forward, should you treat them the same? They’ve generated the same amount of sales/profits this month so should you equally invest your marketing dollars in them? Hopefully, you’ve answered NO. Often people mail their entire customer list the same marketing promotions despite the customer’s needs and likelihood of repeat purchase. This is a waste of marketing dollars.

If you are not sure who your “Best” customers are, you may want to consider doing a demographic profile on your customer base to better understand your customers. Looking at sales volume isn’t always an accurate indicator. A demographic profile will characterize and group your customers according to their age, gender, social class, physical attributes and buyer behaviors. It will help you determine which types of customers have the greatest sales potential and this will help you enhance your new customer acquisition campaigns.

To summarize: Take control now. Evaluate options. Be picky. Consider net present value. Spend marketing dollars wisely. Pay a little more upfront. Pass on one hit wonders. Seek those with greatest future potential. Find this beneficial? Please “Like” my article. Need marketing help? Contact me at: jdetermann@twochicago.com

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