ONE TOUGH QUESTION

THE VALUE OF CUSTOMER LIFETIME VALUE As factors such as customer influence increase in importance, marketers need to reconsider what CLV formula is right for their business.

Customer lifetime value (CLV) should be a simple calculation. But often it’s not so easy. The challenge for some marketers is determining what aspects of CLV to focus on; for example, current versus expected future value, revenue versus profitability, dollar value versus subjective value such as influence. How can marketing leaders decide what elements of CLV are right for their business? And, just as important, how can marketers then use those factors to guide their marketing planning? Ten marketing insiders offer their advice. –Ginger Conlon

TABLE OF CONTENTS

8 Kevin Dodson, VP, Data Strategy, Beckon

4 Arthur Tschopp, Regional Director, Listrak

5 Jessica Kernan, SVP, Global Smart Data, RAPP, Dominique LeBlond, SVP of Product Management, SDL

6 Galia Reichenstein, COO & Head of Sales, Taptica

7 Omer Artun, CEO, AgileOne Michael Clark, Principal, Beeby Clark+Meyler

10 John Young, SVP, Analytics Leader, Epsilon

9 Jerry Jao, CEO, Retention Science Brandon Andersen, Director of Marketing, Cision

ARTHUR TSCHOPP Regional Director, Listrak @Listrak

CLV should be a simple calculation, but the simplicity evolves from detailed business analysis upfront. The first step involves determining margin across product categories to benchmark the correct cost-of-goods formula to apply. Hard work, cross-department communications, and access to a few data analysts will help get these hard costs into the CLV model, because just as ROI is often misstated as return on ad spend (ROAS), CLV can be misleading if the correct numbers aren’t plugged into the calculation. An accurate CLV allows marketers to assign a reasonable customer acquisition cost (CAC). Without it, budgeting becomes a guessing game and doesn’t allow for marketing opportunities that benefit overall revenue growth, remain on brand, and apply strategy across the appropriate channels to build customers’ lifetime journey. When I worked for a retailer of youth action sports apparel, it was clear that the influencer for most purchases was the child, with the parent being the purchaser. Even with accurate margin analysis and numbers plugged into our CLV, we always calculated a variable to adjust our CAC budget to accommodate marketing and acquisition tactics that spoke to our influencers. In short, our acquisition strategy had to include the CLV with an additional spend to adjust for CAC, as well as purchaser budget retention strategies. CLV can be a simple calculation, but it’s the numbers you plug in that determine the overall value to your business. Assigning correct and accurate numbers is where the complexity lies. The devil’s in the details.

JESSICA KERNAN

SVP, Global Smart Data, RAPP @RAPP

While there are relatively few common CLV formulas, calculating it has become increasingly complex in the era of fragmentation, social everything, and industry disruption. Here are three pointers for marketers contemplating customer lifetime value today: 1) Think beyond transactions. Consumers can now contribute significant value to a business or brand without ever buying anything. Active engagement and positive word of mouth can often contribute more to a business than a sale. Determine what behaviors have value for your organization and then work to quantify each of those behaviors. 2) Think about application before calculation. If you don’t have a plan to treat customers of different value potential in differentiated ways, start there. Ultimately, a customer’s value to a brand is a function of the value that brand provides to that customer. Knowing who is most valuable to the business isn’t an excuse to bombard them with more unwanted mass messaging. Create something of real value or you risk breaking your own model. 3) Don’t dismiss alternative metrics. While CLV is often considered the “ultimate” metric and the key to customer-centricity, the reality is that to compute it properly is complex; it requires granular connected data at the customer level and predictive statistical modeling. Consider whether simpler indicators of value such as a loyalty score, propensity score, or NPS can be applied to similar effect.

DOMINIQUE LeBLOND

SVP of Product Management, SDL @D_LeBlond @SDL

Growing CLV is essential to the overall health of an organization and should be considered a key measurement of success. A large part of growing CLV is to avoid customer experience failures from the get-go. In a recent SDL survey asking 3,000 customers to describe their biggest customer experience success or failure over the past 10 years, 76% of respondents were able to recall a CX failure, versus only 55% who remembered a success. Marketers need to be aware that bad experiences make a much stronger imprint on the minds of their customers. This element must be taken into account when putting together their 2016 marketing plans. While CLV is traditionally applied to the cost of attracting new customers, it is important for marketers to consider additional metrics that look at building long-term relationships with new and existing customers. Marketers can do this by understanding the demographics and interests of each individual customer in an effort to provide consistent, personalized brand experiences. In return, this can raise customer loyalty and improve CLV.

GALIA REICHENSTEIN COO & Head of Sales, Taptica @Taptica

There are the obvious benchmarks when calculating CLV: the cost required to acquire a user and ensure a user is engaged, as well as what the users provide in return. If you look at these factors as different channels, this should be easy; but translating them into a holistic CLV is not an easy task. Marketers need to split their analysis of their CLV to shortterm and long-term. In the short-term, it’s more about ROI, the number of users, the amount of data, and getting the right pricing in place. Long-term CLV is about the future: company roadmaps, product roadmaps, etc. Marketers aiming to intelligently decide what elements of CLV are right for their business need to be closely aligned with a company’s current roadmap. The stage of the company’s business plan should be the driver behind marketers’ decisions—whether it’s time to focus on such drivers as product improvement, scale, revenue growth, or margins. Each element in the marketing mix provides the marketer with more data to focus on the long-term strategy.

OMER ARTUN CEO, AgileOne

@OmerArtun @AgileOne

The most effective marketers always keep an eye to the future. Rather than focusing solely on current customers and revenue sources, it’s extremely important to understand buyers’ potential upside (their predicted future spending), along with their historical lifetime value. This information gives marketers the ability to see not just the most valuable customers today, but tomorrow’s most valuable customers, as well. By combining future lifetime value with other predictive analytics, such as likelihood to buy or likelihood to churn, marketers can design enormously effective campaigns that reach the right customer at the right time. For example, retailers can tap into new revenue opportunities by offering promotions to customers with high predicted lifetime value but low likelihood to buy. By offering the right incentive to get these high-value shoppers to make their first or second purchase, marketers can change the course of their relationship with the brand while building customer loyalty and profitability. Similarly, targeting cross-selling and upselling campaigns to customers with a high likelihood to buy but low lifetime value can transform traditionally low-value shoppers into big spenders. Predictive lifetime value is the future of marketing. In today’s rapidly changing retail environment, marketers need to keep an eye on the road ahead. Customer retention should always be the top priority (existing customers are the greatest revenue generators by far), but delighting these customers and keeping them coming back requires constant effort and attention. Understanding future customer spend predictions empowers marketers to build long-lasting and profitable relationships with today’s and tomorrow’s most important buyers.

MICHAEL CLARK

Principal, Beeby Clark+Meyler

@mclark5 @GoBCM

“Plans are nothing; planning is everything.” Whenever I’m asked to discuss CLV, I think of this quote generally attributed to Dwight D. Eisenhower. I know that highly advanced marketers, many of whom are direct sellers to their end consumers, are very focused on getting to “The Number.” For most marketers, however, the simple activity of discussing CLV and moving down the path of CLV definition has enormous benefits, even if getting to a set of agreeable numbers is challenging, either due to incomplete measurement systems or to lack of data. The point, then, of CLV planning, is to better understand your business and how it derives value from marketing activities, and then coming to team agreement on what the important value drivers are or are not. Most organizations tend to focus almost exclusively on the acquisition side of the CLV equation: How much should I spend to acquire a new customer? For most organizations, however, reducing customer churn is the biggest opportunity to increase CLV (and thus the economic performance of their businesses): How much should I spend to keep a customer? Or: How much should I spend to get a first-time customer to make a second purchase? Given this opportunity with existing and first-time customers, we recommend that marketers initially focus their CLV planning efforts on: 1. Gaining team agreement on what a good customer looks like. Who are they and what are their attributes? 2. Identifying current customers that fit this profile and taking positive actions to retain them and to getting new or first-time customers to re-engage.

KEVIN DODSON

VP, Data Strategy, Beckon @BeckonInc

Traditionally, CLV calculation is done at the personal level: John Jones in Middleton, PA, was acquired through display advertising. He’s spent $57 with us in two years. Mary Smith in Omaha, NE, was acquired through natural search. She’s spent $187 with us in one year. What’s the insight? Customers like Mary are better for business. What should we do about it? Let’s go find more like her. No question, knowing CLV is valuable. But individual customer lifetime data is sparse, difficult to acquire, and time-consuming to analyze. In today’s fractured marketplace we’re charged with measuring, learning, adjusting, and scaling data-informed programs fast—faster than traditional CLV calculation and analysis can facilitate. It’s time to ask whether the view is worth the climb. According to The CMO Survey August 2015, 77% of marketers say there’s more intense rivalry for customers today—up from 69% in just six months. Sixty-three percent say there’s increased competitor innovation—up from 56% in six months. In today’s rapidly accelerating marketplace, agility matters. We must rethink our approach to measurement and find faster ways to get smarter about what’s working and what isn’t. We see a future of more creative audience strategy, which means relying on aggregated, segmented CLV to guide marketing planning. It’s much faster to come by, easier to analyze, and indeed serves up the same value as CLV calculated at the personal level. Knowing that females from the Midwest between 18 and 35 who find us through natural search are our most profitable customer segment leads us to the same action: Let’s go find more of them.

JERRY JAO

CEO, Retention Science @JerryJao @RetentionSci

There is, of course, no universal “right answer” as to how marketers should incorporate the different elements of CLV into their marketing planning. However, understanding how different elements translate into specific results is an excellent place to start. For instance, CLV is defined by combining a customer’s historical purchase dollar amount with the amount they’re predicted to spend. Here’s where the question of current versus expected future value comes into play, and there’s a pretty simple way of dividing the two: by viewing each element through the lens of acquisition or retention. Customer Lifetime Value is an important metric to help build a better acquisition strategy. It’s not a difficult concept: If you can identify the channels that bring in your most valuable customers, you can focus on converting more of those high-value customers through those acquisition sources. Looking at the overall value attributed to each source, instead of judging only on cost-per-acquisition amounts, enables you to prioritize profit over spend. Customer Future Value, on the other hand, is crucial for maximizing customer retention. As a predictive metric, it allows marketers to estimate the dollar value of how much each customer is projected to spend. By identifying the company’s future big spenders, CFV enables you to identify which of your current customers you should actively focus on engaging. Because retention is cheaper and easier to execute than acquisition campaigns, this will mean higher returns on your investment over time. To figure out how CLV and CFV should factor into business priorities, marketers must revisit their acquisition and retention strategies. Both are crucial for long-term success, so it’s up to marketers to make the most informed choice.

BRANDON ANDERSEN

Director of Marketing, Cision @Cision

One of the main issues marketers face in calculating true customer lifetime value is determining the actual cost by marketing channel (paid, earned, owned) to acquire and then retain a customer. Accurately measuring these channels is essential in the CLV equation so as not to spend more in the acquisition and maintenance of a customer than the customer’s lifetime value. After all, we’re looking at the margin that client brings in, not just the total revenue. Paid and owned channels are usually measured relatively well in organizations, but earned is a black box to most. Media measurement analytics can help marketers crack that black box and show true ROI on earned media, which can then be fed into CLV models to get a more accurate value. By calculating the true costs and returns of those inputs, brands can better know where to allocate budgets and how much to spend to acquire new customers by channel.

JOHN YOUNG

SVP, Analytics Leader, Epsilon @EpsilonMktg

Although different marketers may choose to define CLV in different ways, the purpose of calculating CLV remains consistent: It’s a tool that allows organizations to make more informed decisions about how to allocate limited marketing dollars across their customer base. By investing more in customers who have greater potential for spending or profitability, and disinvesting in those with lower potential, a company will ultimately achieve better business results. Loyalty marketers use CLV in an additional way: to set points or rewards. Customers with higher CLV often receive bonus points because that additional reward leads to higher future spending. While it is much easier and therefore tempting to define CLV based on historical or current spending or profitability, it is better to define it based on expected future spending or profitability—a measure of what a customer could do, as opposed to what they have already done. In addition, since marketing has greater influence on spending than on profitability, it’s better to base CLV on spending. Another key question is what time horizon to use in calculating CLV. The longer the period the more difficult it becomes to predict, and the less accurate the prediction; therefore, three to five years is a more than sufficient timeframe. Finally, in this highly connected, digital world, individuals have more influence over others’ purchasing behavior than ever before. It’s important to include in the CLV calculation an estimate of how much the customer increases—or decreases—other consumers’ spending with the company.