Digital marketing is an alphabet soup of metrics, using three letters to describe just about any number. Case in point: Customer Lifetime Value (CLV).
You can tote up the value of a customer’s previous purchases and multiply that by average gross margins historic CLV. Or you can figure out the net present value of all future transactions, minus costs. (For more details on equations, see this. )
Companies can use CLV to cut off customers that cost too much and buy too little. Yet those same analytical techniques can be used to identify valuable customers, as well as more average prospects who could buy more if given the right offer.
Same capabilities, different views
All firms use CLV to achieve the same goal: increase sales. But their approaches come from different angles, depending on their expertise.
Optimove offers a “relationship marketing hub” to paying clients. CTO Tal Kedar sees CLV as a tool best based on predictive sales. If a customer is more likely to buy, if given a better offer, then it make sense to make the offer, he explained. “It has nothing to do with what the customer did in the past.”
“If I am interested in optimizing revenue, I have a slew of options,” Kedar continued. It can be done by offering a three-percent discount, free shipping, or through a promotion for a new product. “If I can calculate the difference in a product lifetime value, I can make a data (based) decision which is best for the company.”
CleverTap offers a mobile marketing platform coupled with real-time behavioral analytics to help sharpen CLV. To this end, CleverTap fields its Intent Based Segmentation to find those customer groups most likely to convert. “This way you allocate budgets intelligently to bring predictability to your marketing, and increase CLV in the long term.” said CEO Sunil Thomas.
“Generally, 20 percent of your top customers (champions) contribute to roughly 80 percent of revenue. The ’80/20 rule’ is true for most businesses as some customers are more profitable than others. “ Thomas explained. “It is important to segment customers and double down to get more champion customers.”
CLV is really about the most efficient allocation of marketing resources to gain results, added George Bilbrey, co-founder and president of Return Path, which specializes in email-based marketing. Still, this brings client to a fork in the road. Is it better to spend more on one type of customer acquisition over another, or should a client make a better offer to the customer base he has to boost sales?
How to look at “the spend”
Indeed, there is a split in how clients look at CLV, depending on where in their home organization they reside, Bilbrey noted. Clients who focus on the data understand the CLV of heir market segments and will seek to improve sales by upselling segments to products with higher margins, he explained. Clients who focus on sales will instead focus on the cost of acquiring new customers. Generally, it is harder to find good clients with high lifetime values, while finding average clients is pretty easy, Bilbrey added.
“[T]o be profitable, the customer lifetime value should be greater than the customer acquisition cost. A CLV:CAC ratio of three to one is considered to be good for most businesses. This means for every dollar you spend to acquire a new user, you are earning three dollars from that user,” observed CleverTap’s Thomas.
“Early on in a business, when you are still understanding your product-market fit, you might choose to spend more money on acquiring customers,” Thomas said. “Once you have a critical mass of users (i.e. established product-market fit), you should be obsessed with CLV and work on improving it with retention marketing.”
Different segments will have different costs to reach, added Optimove’s Kedar. Knowing those costs, clients can cap how much they are willing to spend to reach those new customers. “You have to understand the break-even cost of acquiring that.”
Data, data, data
Interpreting the same numbers can lead to different outcomes in CLV. Take the frustrated customer who leaves a negative review on an eCommerce site, or calls customer support with a problem. How relevant is the customer experience to boosting CLV? It may be easier to improve the customer experience than to find a new customer, Return Path’s Bilbrey noted.
Coupling CLV with artificial intelligence allows data scientists to construct algorithms that can calculate the likelihood a given customer will buy something, Kedar said. This capability is typical for super-large corporations like Walmart and Amazon. Optimove can offer it as a service to firms doing as little as $10 million in business, he added.
Data can link the marketing spend to the revenue gained, Thomas said. “Customer Lifetime Value is tied directly to the bottom line.”