The Lifetime Value Myth

Big concepts deserve big debate. But big debates don’t start until someone looks at the big concept and shouts, “Hey, Mom! The emperor isn’t wearing any clothes!”

“Lifetime valuation” is one such big concept. A few years ago it was big, really big.

Even if you couldn’t justify your advertising expenditures based on your present sales, you could justify the expense based on the “lifetime value” you’d get from the customer. This consisted of future sales it would cost little to get once you “owned” the customer.

So here comes Rob Frankel, author of the branding book “The Revenge of Brand X” (and its accompanying tapes), to say that lifetime value is bunk, and that only brand value is real.

“Brand value has always been — and will continue to be — a tangible asset on the balance sheet,” he writes. “But don’t confuse dot-com puffery with real lifetime value. Too many people dismiss the value of their brands as nothing more than the cost of the logo. Don’t fall for that. And in case that seems a tad unclear, let me give you an example:

“Let’s say you decide to sell your business (on or off line). Let’s further say that the buyer is trying to sucker you in to a ‘pay you out as we go’ kind of deal. A little cash up-front and participation in the revenue going forward until you’re totally paid out.

“That’s a sucker deal, and here’s why: First, chances are you’re valuing your business solely on its physical assets and totally ignoring the value of your brand. Second, even though you spent all that time and effort turning your vision into a reality, realize that your buyers don’t share that same vision. In fact, very often, they view your business as a strictly cash proposition — no vision, no culture, no care about the brand. Which means they probably won’t support and nurture your brand and more often than not, will likely run the operation into the ground after they’ve milked it dry.

“Your users abandon the business, because ‘it just isn’t what it used to be’ — and then how much is your stock in the company worth?

“Zippo — with no recourse. That’s how you can see the value of a brand — as it disappears. And if it can disappear, that means it once had great value that you should have been able to trade for cold, hard cash when you sell.

“The truth is that the notion of a ‘lifetime value of a customer’ never was real. It was the lifetime value of the brand that really mattered. It still is. If the brand ain’t there, neither are the customers — or the value of the stock.”

So what is “lifetime value,” you ask? For Frankel, it’s the repository of goodwill customers hold for your company when they go to the marketplace. You can increase that value by doing right by customers, but you also need a shortcut, a memory aid, and a reminder of the confidence they should place in you. That shortcut is your brand.

So let’s end this column and start the discussion with a question. Has the Internet created any great brands and, if so, what are they? Once you know what works and why, you can start to learn what works for you.