Customer Lifetime Value is a crucial metric in the marketing of modern services - Rohit Arora explores the core ideas.
Online marketplaces and shared-economy platforms have been on the rise in all shapes and forms. In this scenario, customer lifetime value (CLV) has become a crucial idea. Simply, it represents the total amount of money a customer is expected to spend with your business, or on your products, during their lifetime. For example:
A new to the city DINK (double income no kids): busy expats, middle-income, in a city averaging a stay of 5 years, might be worth the following to a food-delivery app who charges an average of 25% commission:
$6.25 commission (25% of average $25) per order
X 8 average orders a week for lunch &/or dinner
X 52 weeks X 5 years
= $6.25 x 8 x 52 x 5
These can be further granularized to sub-categories, consumer interest and mindset segments and calculated across categories.
How can CLV help?
To answer this vividly, let’s first do a variation of the above example – a general hypothesis may be that the larger the size of the family, the greater the CLV – right? So, let's imagine a new expat family with 2 kids and single income, might be worth the following:
$11.25 commission (25% of average $45) per order
X 2 average orders a week (assuming a lot of food being prepared at home)
X 52 weeks X 5 years
CLV can vary with several elements. You must consider the cultural dynamics too, e.g., in many Asian and Middle Eastern countries it is relatively common to have help and/or cook and/or nannies at home, in contrast to the DIY culture in the west. Similarly, each category and sub-category will have their own dynamics.
CLV helps in decisions on how much money to invest in acquiring new customers and retaining existing ones. But also, provokes granular questions like:
- Who are my most profitable consumer segments to prioritize?
- What proportion of revenues should I invest to acquire a similar customer and be profitable?
- What are my higher CLV customers seeking from our product line?
- Which of our products have the highest profitability? And so on.
CLV – nurturing existing customers or acquiring new?
A lot of companies focus on the old notion that it costs 5X more to get a new customer, but in doing so, are they losing focus on connecting with customers and delivering value, both now and in the future? According to Wharton Marketing Professor Peter Fader, speaking to Forbes: "Decisions about customer acquisition, retention and development shouldn’t be driven by cost considerations - they should be based on future value.”
This doesn’t mean that the cost-quotient should be ignored, but one should not ignore the relative potential and the value of acquiring a new customer.
CLV and new consumer acquisition
- From a qualitative marcom messaging perspective, CLV can help identify the primary and secondary consumer segments. A deep dive on their needs, wants, conflicts, desires, triggers and barriers can help develop marcom and content strategies across the sales funnel.
- Identifying them for digital marketing is where it’s getting more interesting with further developments in algorithms. For example:
- Facebook’s value-based lookalike audiences: by adding a customer lifetime value column, the lookalike audience will then be made up of the people most similar to your highest value customers (more here).
- Google’s Smart Bidding with Maximize Conversion Value: by uploading CRM data to Customer Match audiences, Google matches it to users’ accounts. This goes beyond just cookie data to identify customers that you’ve acquired from all sources and may have had for many years. Once you identify this audience, you can exclude it from your campaigns to ensure you are only targeting new customers (more here).
- Incentivized referral programs are common tactics encouraging existing customers to recommend to their connections. More than 50% of respondents are likely to give a referral if offered a direct incentive, social recognition or access to an exclusive loyalty program (Software Advice, 2014).
CLV and consumer retention
- Pleasant onboarding UI and UX: 360-degree walkthroughs, how-to videos and interactive videos. 86% of consumers are willing to spend more to have a great customer experience (PWC, 2020).
- Under-promise and over-deliver: 84% of consumers consider customer service to be a key factor when deciding whether to make a purchase or not (Zendesk, 2019). Delivery dates is a classic example where there’s over-promise to entice and an under-delivery that can potentially take away from future business potential.
- Excellence in customer service: 93% of customers are likely to make repeat purchases with businesses that offer great customer service (HubSpot, 2018). Omni-channel support, live-chats, response time, 24x7 availability are some of the points to consider relevant to your industry and competitive setting. 48% of customers expect companies to respond to social media queries within 24 hours (Microsoft, 2018).
- Investigate every piece of negative feedback: Only 1 out of 26 unsatisfied customers complain (HuffPost, 2017). As Bill Gates said, “Your most unhappy customers are your greatest source of learning.”
- Engagement content: Winning customer loyalty also means strategically planned hero, hub and help content to continuously inspire and/or entertain and/or being useful – think of Nike’s recent introduction GO FlyEase, the hands-free footwear (being useful) and You Can't Stop Us film in the middle of pandemic (inspiring). Similarly, optimizing social media presence with a clearly defined social value-proposition combined with tactics like competitions, polls, promotions, etc. can help. With CRM tools and an intelligent (read: overdone) email marketing strategy too, brands can have a meaningful dialogue over time.
- Loyalty programs: Often rewards that are realistic and desirable encourage repeat purchases. Members of retailers’ customer loyalty programs generate 12% - 18% more revenue for retailers than do customers who are not members of the loyalty programs (Accenture Interactive).
- Upsell and cross-sell: Quite a common tactic across categories to get customers to spend more on a higher configuration and/or buy complementary products/services. Upsell and cross-sell strategies are solely responsible for an average of 10-30% of e-commerce business revenues (Forrester research).
Strategies to maximize CLV can not only help improve prudent marketing investment decisions, but it can also spark better data collection and collaboration, a more holistic view of the customer base and think beyond the short-term transactional gains.
This conversation is beyond ROAS (Return of Ad Spend), beyond conversion-focused sales funnels, and beyond CAC (Customer Acquisition Cost). This is us acknowledging the impact it cascades over time, with every campaign and decision we make.
*These figures are NOT a net revenue for a food-delivery app business, which is calculated after deducting net delivery cost, sales and marketing cost like payment fees and marketing cost for triggering repeat orders, customer acquisition cost for their first order and average fixed costs like salaries, tech infrastructure, rentals, etc. The illustration is clearly simplified for easy understanding and theoretical.