Jim answers questions from fellow Drillers

Topic Overview

Hi again folks, Jim Novo here.

The car business is interesting because the Customer Lifecycles can be so long and the value of a customer beyond just the car (service, etc.) is a huge factor. Can this industry use Lifecycle ideas? You betcha, Drillin’ is Drillin’ …

Q: Do you happen to know approx. calculations of LTV for the car-industry? I wonder what this might be for a person that buys every a new car every 3 – 5 years, including service profits, etc.

A: The only published, verified study I know of on this was done by General Motors for their Cadillac division. To quote:

“Each new customer that comes through the door of a Cadillac dealership represents a potential LTV of more than \$322,000. The figure is a projection of the number of automobiles the customer is likely to purchase over his or her lifetime, as well as the services those automobiles will require over a lifetime.”

Take that number and extrapolate based on the average margin on sales and service for any other car, and you should get pretty close. Looks to be somewhere around 6x – 8x the original purchase price, perhaps?

Assuming service costs on a car are basically the same whether the car is cheap or expensive (perhaps a bad assumption, in the case of Jaguar, for example), there is not a direct relationship between initial price and LTV; it’s a bit more “flat” than direct. That is, for lower priced car lines, the LTV is higher than implied by 6x-8x price; for higher priced cars, the LTV is lower than implied by 6x-8x price.

I’m not a fan of it, but some would include the value of customers recruited by the original customer in LTV. If you include the value of the recruited customer in the LTV, then what is the recruited customer worth? It’s double counting the profits.

However, if you are looking at cost to acquire a new customer, then you can factor recruitments in, because the sum of the original LTV and the recruited LTV’s represents the maximum you can pay for new customers. The point is, both the original customer and the recruited customer each have their own LTV, which can be summed when looking at the cost to acquire a new customer. When asking the question, “What is the LTV of the customer?,” the recruitments should not be included.

Jim