Lifetime value of a customer
By: J. David Chapman/July 23, 2020
I know and understand the lifetime value of a customer. Years ago, I was called to a small ranch to list a property. The couple had three small children and were getting a divorce. They were both there. We toured the home and listed it that day.
I also made an appointment to show the wife homes that weekend. She purchased one in a nearby neighborhood and closed 30 days later. In the meantime, I sold the ranch and the husband moved into a rental we owned in Edmond. After he lived in the rental for over two years, I sold him a large home in Edmond. In a few years, he called to tell me he was getting married and she had a home in OKC that they would like me to sell.
As soon as I closed on that home and they were married, we started shopping for a new home for them. Sure enough, we found a beautiful home in which they raised their blended family. Recently, I had the opportunity to sell that home and downsize them to another in the same neighborhood. Oh, by the way, along the way I was able to list and sell his father’s home as well.
For the Realtors reading this, you might be adding up the commissions. These commissions are the lifetime value of a customer in the real estate brokerage business. In my example, I received 3% on some transactions and 6% in others, producing well over $100,000 in commissions.
Academically, lifetime customer value is a prediction of the new profit attributed to the entire future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques. The obvious reason for the calculation is to determine how much money to spend in obtaining a customer and how much effort should be invested to retain a customer.
Some of the industries with highest LCV are cellphone companies and razor companies with replacement blades. They understand the lifetime value of a client. Those businesses pay little or no attention to the profit they earn on the first sale. Instead, they know that their profit derives from leveraging client lifetime value. Real estate brokers and agents could learn from this mentality.
J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).