The customer’s lifetime value (CLV) is the value of the customer over the whole life of the relationship.

We use the definition from In search of Relevance: A new model for a new reality: “There are two views of what makes up CLV. One view is that lifetime value is current value and future value over three to five years.”

This assumes that historic value is amortised and should be ignored. The rationale for this is that the customer should receive a level of service and a customer experience appropriate to the customer’s value. All three will change over the customer’s time with the bank and there is no reason a higher level of service should be provided because the customer was valuable in the past.

As an analogy, no bank would ever attempt to calculate a ‘lifetime credit score’ for a customer. Most demographic-based or behavioural-based credit scoring models calculate a score based upon the likelihood of a customer defaulting in the next six months.

The argument for disregarding historic value is that it can result in banks making decisions based on the past rather than the future. The resources available to banks to keep and develop their most valuable customers are finite, and they must concentrate these on what they can influence – that is current value (retention) and future value (growth). If they do not do this, there is a risk that banks will not keep and grow their best customers, or their sustainable income will drain away as their earnings from profitable customers declines.

The argument for disregarding long-term projections of customer value is that they are unpredictable and academic. Life, as we know, is uncertain. And so is customer value.

The other view is that lifetime value is the total of historic, current, and future value. If this approach is used, the calculation takes a long-term view of future value. This rewards customers for the long-term value they have created.

The argument for including historic value is that this rewards loyalty. Using historic value as a measure of loyalty reflects the shift from tenure to value that is described in the previous section. Rewarding loyalty may benefit the bank through the loyalty ladder.

The idea of the loyalty ladder is that organisations wishing to take a relationship approach to dealing with their customers should attempt to migrate them through five stages: prospect, customer, client, supporter, advocate. Advocates, the highest level, are customers who help to promote the bank. This fits with third-generation thinking and the rise of the social media peer-to-peer recommendation.

It is possible that any decline in current or future value may result from some form of transfer – for example, an intergenerational transfer of resources from parents to children. If the result of this is that the parents receive less favourable treatment, will this encourage them to recommend the bank to their children?”

Source: © In search of Relevance; A new model for a new reality, Intelligence Delivered (Asia) Limited (Amended) 2012.