This post originally appeared on the Umbel blog. The Umbel Marketing team helped edit and refine the original content.
WHY EMBRACING CUSTOMER LIFETIME VALUE WILL CHANGE THE WAY YOU DO BUSINESS
Calculating customer lifetime value (LTV) down to the individual is not a new concept.
However, LTV is one of the most important metrics a business should track. So what is LTV exactly? LTV represents the amount that a particular customer is expected to spend over the duration of his or her relationship with a particular business.
For example, Wal-mart knows that I purchase online once every two months and spend $20 each time. Through a series of predictive models, Walmart can predict that my lifetime value is $89.25. The lifetime value metric incorporates how much it cost to acquire me, how much it costs to retain me, and discounts future cash flows.
Technology companies, including Umbel, are now calculating LTV in a more scalable way to help businesses establish a closer relationship to their customers and the channels where they were acquired. So now that Wal-mart knows that my LTV is an estimated $89.25, what strategies can they implement to increase this number?
I UNDERSTAND LIFETIME VALUE, NOW WHAT?
Customer acquisition is one of the most immediate actions a business can take once they know the lifetime value of a customer. Did an individual or set of individuals purchase after clicking on a display, search, or social ad? Allocating ad spend today across channels is based on the return on ad spend generated, not the lifetime value of customers acquired. So if search ads generate twice as much in revenue than social ads, search will receive twice the budget.
LTV goes beyond the session in which the purchase took place. It looks at all other purchases made by the same person and predicts how much they are likely to spend. When looking at customer lifetime value by channel, a marketer might notice that even though search ads have a higher immediate return on ad spend, social ads drive customers that have a higher lifetime value. This information might be enough to justify allocating more of the budget towards social than to search.
Paid media acquisition is the most talked about use case for businesses that can calculate lifetime value, but there are a number of others that are equally important. Email marketers have to make decisions every day. Which list to segment? Who to remarket to? What products to show? How often to deliver a replenishment campaign? Resources are always limited and the marketer needs to launch a campaign that will be effective. Understanding the lifetime value of various customer segments can help email marketers prioritize who to message.
If they notice that people who purchase Yoga calendars have a higher lifetime value than people who purchase the Game of Thrones board game, they should focus cross-sales efforts to the people who have the higher lifetime value.
HOW DO I CATER TO CUSTOMERS WITH A HIGH LTV?
Customers who are worth more tend to expect additional service. They might get invitations to special events, receive promotions before others do, or receive a phone call from time to time. In the world of sports and entertainment, the people who are worth the most are the season ticket purchasers. These fans are loyal, devoted, and are willing to buy tickets ahead of time so that they can bring their families all season long. Season tickets are sold online but are also sold directly through call centers. Call centers use CRM systems to keep track of customer records and (hopefully) have up to date data on the customers getting called. Lifetime value should be a metric included in the CRM. The individual at the call center should have a prioritized list of calls to make that is based on the value the person on the other end of the line will ultimately generate for the team. They can also use LTV to allocate their time on calls. Customers with a higher lifetime value will receive more attention than customers with a low lifetime value.
LTV is an important metric for brands, retailers, sports, and entertainment. It directly measures the value these businesses create or their customers and the value those customers share in return. Once a company can calculate lifetime value, it can use it in a number of ways that go beyond customer acquisition, and it’s important to do so. It informs the decisions made in many other parts of the business.
Lifetime value is a powerful metric that goes beyond the paid-media team within an organization or agency.