As marketers, we can sometimes be our own worst enemies. We’ll turn meaningful phrases into meaningless buzzwords, procure the latest shiniest technologies, even if it means we end up with a stack of 20 vendors and worst of all, we’ll allow our deep love for data to drive us right into analysis paralysis, celebrating any new metrics or insights we find – and the faster we can get them, the better – rather than focusing on those that matter the most.
To that end, perhaps the marketing argument du jour is no surprise: is customer lifetime value truly an operational metric, and does it matter more than everything else?
In theory we all know that long-term customers are far more valuable than leads or even freshly-minted activations. Yet when the rubber meets the road, marketers time and time again focus on short-term gains over long-term value. And since we’re no longer operating in the dark days of inaccessible data and nascent technologies that once precluded a single customer view, there is simply no reason why marketers should not be embracing their ability to upgrade to more classical, conventional marketing metrics.
Indeed, turning our backs on customer lifetime value (LTV or CLV, depending on who you speak with - again with those acronyms!) is arguably the most dangerous movement against the progression of modern marketing, as any other metric celebrates growth over profitability.
So, where is the CLV resistance coming from and more importantly, how do we bridge the gap and help marketers to not only understand its criticality, but to embrace it as the day-to-day metric that matters most?
1. Reporting cycles require short-term focus
Any good marketing strategy includes a healthy balance of customer acquisition and retention strategies, a. At least in theory. But then there’s the last week of the quarter, when a brand manager, VP, or perhaps even the CEO stops by your desk to casually mention that she’d like higher sales figures for that period. Worse yet, she may muster those five words that make most marketers cringe, “can we run a promotion?”
Any smart marketer can think of hundreds of different tactics to improve conversions in the short term, but most of them boil down to some kind of sale or incentive. And with those incentives, all the careful planning around how to cultivate repeat buyers and breed loyalty is cast aside in favour of hitting short-term numbers. This happens quarter after quarter, year after year.
The same powers who are quick to succumb to short-term pressures will, of course, challenge the materiality of the impact of holding out. To offer a compelling perspective, think about the typical holiday season for retailers; most marketers pump a significant portion of annual marketing dollars into paid search and other acquisition tactics during the holiday season, with the end goal of driving sales. However, had those marketers invested more time and resources in nurturing the customers they acquired years ago to remain repeat and loyal customers, the gap that would need to be filled to hit sales targets would be significantly smaller, and top-of-funnel would require substantially less investment during the most important time of the year.
Sailthru and Forbes recently surveyed 300 executives in retail and publishing and revealed that while 69% of retail execs and 73% of publishing execs feel that their organizations have a significant understanding of the causes and effects of customer lifetime value, only 15% of them work in organizations where management understands the impact of CLV on company revenue and growth. Let the holiday season example be a memorable one: a stronger lifetime value figure means stronger cohort revenues over time and ultimately, more profitable customer relationships.
To drive the shift, the conversation away from short-term success and toward long-term gains, marketers must connect the dots between lifetime value and profitability. All too often we are blindsided by something as simple a cost per acquisition metric – for example, when we find a new “cost-effective” acquisition channels such as sweepstakes – with little regard for the long-term value of those cohorts. In other words, what happens when only 2% of the leads we acquire actually transact? In actuality, some of the marketing investments that feel most expensive today – and are often optimised right out of the mix because of seemingly high upfront conversion costs – could yield the strongest long-term customer value; direct mail is a long-lost example.
Remember, growth may win daily headlines, but profitability wins’ years of success (never mind business solvency).
2. Shiny tech fails to deliver
Some of the earliest marketing automation innovations revolved around “drip” retention campaigns—effective, efficient ways to stay on a customer's radar between purchases. But even with this so-called retention focus, both these early technologies as well as the newest, shiniest tools focus on driving engagement and revenue today. They emphasise multivariate testing to drive conversions and sales today. They offer browse abandonment to drive a transaction now. So while metrics such as repeat purchases may be critical ingredients to retention, they can be red herrings if not thought about comprehensively in the broader context of customer lifetime value. CLV is about the customer lifetime value, not channel lifetime value.
The sheer volume of these shiny tools is skewing marketing priorities. Take a look at this chart from VB Insights: what's winning the hearts and minds of marketers? Short-term goals. Conversion rates. Time spent on site. Registrations and new lead generation. Only 10% of marketers say their investments are supporting CLV efforts. By buying into the flood of conversion-oriented tools, marketers are putting themselves on a treadmill to try to fill a leaky bucket instead of focusing on their most promising asset—the customer file already on the books.
Of course, you can’t easily report on what you can’t easily measure, so we see marketers fighting against CLV. And it’s not that they’re incapable of the math (more on that next), it’s that with the hundreds of competing priorities on the modern marketer’s plate, complex measurement often falls to the wayside; in the context of CLV, this is exacerbated by the fact that there are only a handful of marketing technologies that make CLV and cohort measurement possible (and more importantly, digestible and actionable).
But these tools do exist and ever better yet, there are now marketing clouds that can empower marketers to leverage their downstream data to optimise new customer acquisition. Evaluating technologies for their ability to facilitate a long-term, customer-centric view ultimately means you’ll sharpen your focus on acquiring more valuable/profitable customers, and will regain time and sanity during those end-of-quarter and seasonal frenzies.
3. The math is harder
Marketers gravitate toward acquisition because the math is short-term and straightforward—this many dollars out the door yesterday and this many dollars in sales today, close the books and move on. Customer lifetime value has more unknowns, ranging from the future value of money to churn rates and even black swan events that could wipe out entire industries. And even when the math is there, many CLV sceptics are doubting its value.
Get ready for the plot twist: this scepticism can often be justified! Most frustration with CLV as an operational metric stems from how it’s calculated, especially when it is derived using legacy CLV frameworks, including those that rely on inflexible regency/frequency/monetary (“RFM”) modelling. While RFM undoubtedly works for segmentation purposes, it is limiting for CLV because it is backward-looking and only takes into account a brand’s known buyers (for many online retailers, this group might constitute <20% of the overall customer file). Prior purchase behaviour is a single dimension for determining future outcomes.
That said, these sceptics need to embrace newer CLV measures enabled by big data. Newer CLV models can include 50+ different inputs for CLV, ranging from number of emails or push notifications received to number of site visits and clickstream behaviour. The math is bigger than any individual or team can produce on their own, but machine learning technologies make it available at a fraction of the cost and a multiple of the speed.
More importantly, these models can predict CLV for the individual vs. the segment or decile. And most importantly of all, when embedded in a marketing cloud, these CLV predictions enable marketers to optimise swiftly and effectively while always keeping a tangible pulse on the long-term implications of their optimisation decisions. Above all, they empower marketers to think of the “future” as more than just a holiday season away.
By Cassie Lancellotti-Young, executive vice president of customer success at Sailthru
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