By Sandra Gudat, President/CEO
It goes without saying that our customers are our greatest assets. The goal of every CMO is to develop these assets and grow their value to the company. And, as retailers know all too well these days, customers are humans and as such their relationships with us can be very dynamic. Customer Lifetime Value (CLV) analysis, and the CLV metrics gathered, can be excellent tools in retail marketing, allowing us to benchmark how well we are doing in developing and nurturing those relationships.
Calculating Customer Lifetime Value
There are many ways to calculate lifetime value — from the simple to complex, basic math to calculus. A simple Customer Lifetime Value formula looks like this:
A more complex Customer Lifetime Value equation employs the net present value of future payments and looks something like this:
Source: “Modeling Customer Lifetime Value,” Journal of Service Research, published Nov. 1, 2006, http://journals.sagepub.com/doi/abs/10.1177/1094670506293810, accessed April 4, 2017
In my experience, marketers don’t always have to use the most complex Customer Lifetime Value calculation to derive value from CLV. A simple approach can suffice in many situations.
- Further reading: “HBS Toolkit — Lifetime Customer Value Calculator” from Harvard Business School
- Further reading: “Have you scored your customers today?” CCG white paper
The Struggle Is Real with Customer Lifetime Value Calculations
In addition to the complexity that one can undertake when calculating lifetime value, there are other challenges. For instance, getting all your customer interaction data into one place for Customer Lifetime Value analysis can be a heavy lift in many organizations. This is compounded in siloed organizations. For instance, some retailers’ e-commerce, store point of sale, catalog sales, social media and customer service data may all live in separate places and not play well together.
Research conducted by Econsultancy, which comprised 900 respondents, showed the struggle is real. While 76 percent of respondents somewhat to strongly agreed that Customer Lifetime Value is an important concept for their organization, only 11 percent strongly agreed that they were able to actually measure it.1
Once You Have It, Use It
If you have gone to the trouble of Customer Lifetime Value calculations, are you truly maximizing its potential uses? Read on for seven ways to make sure you’re getting the most out of your CLV analysis.
1: Focus on the Long Term
In our short-term, quarterly-profit-focused world, Customer Lifetime Value forces us to take a long-term view at how our activities impact our relationships with customers over time. It’s not just about whether we drove traffic this weekend, but whether we are persuading our customers to come back again and again — this year and the years to come. It forces us to think about what we are doing to nurture long-term relationships with customers.
A well-constructed loyalty program, for instance, will motivate customers to consolidate their category purchases over the longer term to earn a reward at some point in the future. Oftentimes, organizations with a very short-term focus have trouble with the concept of a loyalty program for just this reason.
2: Prioritize Resources
Beyond using Customer Lifetime Value in aggregate, it helps us understand the value of an individual or groups of individuals to the organization. It helps us prioritize where to invest and where we might want to leave well enough alone. Not all customers are created equal, and some you need to prioritize over others. Customer Lifetime Value helps you determine how to invest your CRM dollars.
When working with a major national pet supply retail chain, we had the opportunity to interview store managers throughout the organization. We asked them: Who are your most important customers? Repeatedly, many store managers would respond that their most important customers owned reptiles and these pet owners visited the store two to three times per week to buy live crickets to feed to their pet. These were the customers that the store managers got to know over time and had built relationships with.
However, when analyzing the customer data, the most valuable customers were, in fact, owners of a large dog or multiple dogs who shopped once a month to buy large bags of dog food. These folks were flying under the store managers’ radar. Creating a strategy for store managers to recognize the value of dog owners and thereby handle them accordingly was crucial.
3: Make Better Decisions by Enhancing Your Metrics
Customer Lifetime Value can be the common metric that unlocks and illuminates other analyses. For instance, looking at the CLV of different customers or groups of customers and comparing CLV to the cost to acquire, cost to retain and service brings a new perspective as we begin to see where our efforts can really pay off and where we are just wasting time and money.
For example, we can use Customer Lifetime Value as a method to evaluate different acquisition channels. Looking at the average CLV by source of new customers allows us to prune away the channels (and their expense) that are not attracting the right types of customers and to refocus those dollars to those channels that tend to attract more high-value customers.
One major online flower retailer discovered that advertising on certain radio stations attracted a high proportion of one-time buyers (therefore with low CLV). So they redirected their radio spend to those channels that drew higher CLV customers.
4: Get Granular
Customer Lifetime Value can be most useful when looking beyond an average CLV to a segment, persona, aspirational persona level or, at the most granular, individual levels. One major sports organization found that its top 20 percent of CLV customers contained multiple, highly differentiated segments. Up to that point, they had lumped the top 20 percent of members into a single category and pretty much considered them to all be virtually the same. Had they stuck with viewing these customers in terms of averages, they would never have recognized there were different types of top customers and would not have then engaged with them appropriately.
5: Historical Benchmarking
Lifetime value can also be used as a historical benchmarking metric. It can help us with evaluating specific strategies or long-term campaigns by benchmarking the target audience prior to deploying the strategy or campaign, and then measure any change in lifetime value of that group after the strategy has been implemented.
6: Sales Forecasting
Customer Lifetime Value can be an essential aid in forecasting. For instance, it can assist by more accurately predicting future revenue from existing customers. It can also show the value of campaigns directed at new customers by aiding in forecasting revenue potential and thereby better predicting return on investment. This can make a marketer’s job a little easier when selling up new initiatives to CEOs and CFOs by providing a greater level of confidence in anticipated revenue from both existing and new customers.
7: CLV Isn’t Just for Marketing Anymore
The wealth of knowledge that comes from understanding lifetime value shouldn’t reside only in the marketing department. It can be an essential tool for other parts of the organization, as well. The folks in product development or merchandising can use CLV to develop or source products that are attractive to segments with high CLV. Conversely, they can add products into the mix that might increase overall CLV. Arming customer service with customer-level CLV can aid in formulating responses and processes to customer service issues.
Many years ago, a major national outdoor grill manufacturer discovered that customers with the highest lifetime value tended to incorporate the act of grilling as part of an overall outdoor living experience. Armed with this knowledge, the manufacturer created high-end outdoor kitchen and grilling products to serve this market and put itself at the forefront of what has become a major trend in outdoor living.
If they hadn’t looked at their customer segments from a Customer Lifetime Value perspective, they would not have caught onto this trend so early and developed products with the intention to enhance CLV (and we might all still be eating indoors in the summer!).
A Remedy for the Times We Live In
As marketers, more than ever before, we live in interesting times — a concept of both opportunity and upheaval often referred to as a Chinese curse (although it’s origin is more than likely British). The extremely dynamic nature of our business and the ever-changing way our customers can engage with us accentuates the need for a metric like Customer Lifetime Value.
What strategies do you have in place that are bringing customers back again and again? How can you invest in other strategies that will acquire the right customers as well as retain and develop them? What strategies are in play to bring customers back? Customer Lifetime Value analysis is the metric that helps us understand the effectiveness of our efforts in a constantly changing and dynamic world.
Don’t have the time or the team to complete a Customer Lifetime Value analysis? Let us help. We can do the research, crunch the numbers, help you build a strategy and work with you to implement it. Learn more about our retail marketing capabilities and services, our experienced team and the challenges we can help you overcome.
1 “Just 42% of Companies Are Able to Measure Customer Lifetime Value,” Graham Charlton, Econsultancy.com, posted April 8, 2014, https://econsultancy.com/blog/64659-just-42-of-companies-are-able-to-measure-customer-lifetime-value, accessed April 3, 2017