Customer Lifetime Value: One of the Keys to Measuring Long Term ROI – Among Other Things

January 13, 2014 by Olivier Blanchard - 2 Comments

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LTV infographic by Kiss Metrics

“People pay you. Not pageviews.” That pretty much says it all. (image source.)

This is as badass as it is self-explanatory. For those of you who don’t know how to estimate customer lifetime value (LTV, or CLTV), this infographic should be a pretty handy little tool. (Just ignore the Starbucks references.) Why is this important? 3 reasons:

1. When justifying an investment in a marketing program whose goal will be to acquire (create) new customers, you can sift through your customer data and determine what the average customer spend (their value to the company in terms of net revenue) should be over time. You can drill into demos or average out every customer category to arrive at a gross average – that’s up to you. This helps you set targets. If the investment is $100,000 and management expects a x10 return on their investment for a certain timeframe, you can now figure out what your net new customer target needs to be for this campaign by performing some basic 8th grade math. If the brass still isn’t sure about the value of the investment, you can make your case by projecting the lifetime value of net new customers rather than monthly, quarterly or even annual sales. For that alone, it’s a handy little set of equations

2. Good marketing is about more than customer acquisition. It also has to focus on customer development and customer retention. When making your case for a program that focuses on keeping existing customers from leaving, being able to present LTV/CLTV figures provides you with a compelling argument for the funding of such programs. (It is a lot more cost effective to develop and retain customers than to acquire new ones.) Use LTV to model for management what breaks in the conversion chain will cost the company in lost revenue over time, and loyalty programs will be a lot more likely to get a little more love. If you spend $5,000,000 to onboard 10,000 new customers per year only to lose 60% of them by the following year, you can see whether or not your marketing plan is in fact a leaky bucket. You can’t know what you don’t know. Calculating LTV gives you parameters with which you can properly analyze your programs’ efficiencies and inefficiencies, including long term ROI.

3. Once you know your customers’ overall average LTV, you can start attacking not only the net new customers piece (acquisition) and the retention piece (loyalty), but the development piece as well. Say your overall customer LTV average works out to be $14,099. Why not try and move that needle up to $15,001, then $15,100, then $15,250?  This is the purpose of the customer development side of marketing (or business development, even). Devise ways to grow wallet-share. Increase average spend per transaction (yield) and buy rates (frequency). [Remember FRY? That’s what we’re talking about right now.] Tracking this number not only gives you baselines from which to devise targets and tactics, but it also gives you a dashboard needle with which to gauge your progress AND revise long term sales projections.

Do you know how many product managers and CMOs know how to do this (or bother to do this kind of analysis even if they do)? Not many. If you smell an opportunity to suddenly become a whole lot better at your job and maybe even impress higher paygrades with your business acumen, it means your nose is working.

One quick piece of advice: Don’t just file this away for later. Do something with it. Print the infographic, start playing with the equations, and see what you come up with. Create a baseline. Play with projections. Sift through customer data to see if certain demos might be more receptive to different types of messages and offers. Then use the data; don’t just collect and report it.

Very big hat tip to Business Insider and Liz Scherer for starting the information daisy chain, and of course a big thank you to Kiss Metrics and @avinash for putting together such a clean, clear and concise infographic detailing the LTV calculation process.

PS: If you aren’t familiar with F.R.Y. methodology, it’s all spelled out here:

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Score your own copy of Social Media ROI: Managing and Measuring Social Media Efforts in Your Organization (Que) just about anywhere business books are sold, if you haven’t already. The book is actually about a whole lot more than ROI and focuses on a lot of business fundamentals with applications reaching beyond the digital world. (The Chapter on F.R.Y. will be particularly helpful given today’s blog topic.)

You can also check out smroi.net to dig deeper into the book and even sample a free chapter, or let the reviews on Amazon.com help you decide whether or not it is worth the price of a turkey sandwich.

Cheers,

Olivier

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Want to help improve business through your digital programs? Pick up a copy of Social Media ROI – Managing and Measuring Social Media Efforts in your Organization. The #1 Social Business desk reference for executives and digital managers.

(Now translated into a bunch of languages including German, Korean, Japanese and Spanish.)

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