A Note on Willingness to Spend and Customer Lifetime Value for Firms with Limited Capacity

The paper draws a distinction between customer lifetime value (CLV) and willingness to spend (WTS). By WTS we mean the maximum amount the firm should be willing to spend to acquire (retain) the customer relationship. In order to avoid the double counting of cash flows when summing the CLVs of customers, we suggest including only direct cash flows in the formulation of CLV. This convention means that CLV will equal WTS if (and, for the most part, only if) the firm's relationships with customers are independent. By independent we mean that the acquisition (retention) of Jane Doe has no effect on the cash flows of any other current or future customers. In contrast to well-understood demand-side dependencies among customer relationships (such as referrals), this paper highlights a particular kind of supply-side dependency—that created when the firm is limited in the number of customers it can serve. Using an extended version of the model of Blattberg and Deighton (“Manage Marketing by the Customer Equity Test,” Harvard Business Review, July–August 1996, 136–144) of customer equity, we demonstrate that, for a firm at capacity (in this model), CLV is no longer relevant to marketing spending decisions and the firm can prefer a lower-CLV customer.

Research Highlights
► Customer lifetime value (CLV) is distinct from willingness to spend (WTS).
► WTS will equal CLV only if customer relationships are independent.
► Limited capacity leads to dependent customer relationships.
► Limited capacity means CLV will not equal WTS.
► Firms with limited capacity can prefer the lower CLV customer.