You are a modern consumer product company looking for the next advantage in the market. You were born digitally transformed; you’ve built marketing and distribution strategies that work — and have even implemented a customer data platform to map your customer journey and up your analytics game. Yet, you still find yourself squeezed between slim margins and ever increasing costs. The good news is that a new transformative approach has arrived that can change the tide in your favor.
The secret metric you have yet to consider is Total CLV (customer lifetime value).
In her recent Internet Trends Report, Mary Meeker warned: “CAC can’t exceed LTV for very long…for those of you in this business you know it.” That is, with the customer acquisition cost (CAC) ratcheting up each quarter, survival now depends on acquiring customers whose total (past and future) per-customer lifetime value exceeds their CAC. If you don’t find these customers, your business will be underwater. It will only sink further with each new acquisition.
The best brands are using Total CLV already. Stitch Fix’s major investments in data science have led the company to predict customer lifetime value based on a customer’s reaction to his or her first box (or “Fix”). Madison Reed, the fast-growing women’s hair color venture, works with Retina to predict how hair-color choices affect Total CLV. The best eCommerce and retail brands are turning CLV into the centerpiece of their customer strategy.
Computing Total CLV
Computing Total CLV is not as easy as one might think. It might be tempting to fire up Excel, do a little searching online, and come up with a number. But approaches like these treat customers as if they are the same, resulting in a single average value for all of them. While this might be fine for financial forecasting, it’s useless for taking strategic action. You need per-customer CLV.
There’s no Excel formula for predicting CLV for each individual customer in a way that takes into account their purchasing rhythms and sensitivities to price. This requires sophisticated models, such that those developed by Peter Fader and other researchers. It also requires a data scientist trained in machine learning. If you have both the models and the machine learning talent, you can handle and predict all types of customer buying behavior, from the infrequent impulse buyer who responds to seasonal promotions, to the frequent loyal customer who purchases consistently, regardless of discounts.
A good model takes in the commonalities of all the customers unique to your business, and then combines that information with per-customer behavior in order to predict future purchases and future dollars. The model should be back-tested through a process of comparing actual recent customer purchases to the predictions the model would have made in the past. And the model should be able to handle new customers, for which there is limited past behavior to measure.
Use Cases for Total CLV
So, what can you do with per-customer Total CLV? Transform your entire business, that’s what.
When it comes to customer acquisition, you can use Total CLV to create targeted acquisition strategies that obtain more high-CLV customers and fewer low-CLV customers. Facebook and Google have both built tools to aid in targeting audiences by their value. You can also look for trends in the types of customers who have high CLV, and generate specific messaging and marketing strategies for them.
To aid customer retention and re-engagement, it’s important to focus your efforts where they will make the most difference. High-CLV customers should be given more attention to retain their loyalty, and discounts and promotions should be focused intelligently on the areas where customers have not already made a purchase. Similarly, to gain an edge in the marketplace and fine-tune product merchandising strategy, it is crucial to know how your product selection and pricing affects the purchase behavior of your customers.
The Power of Total CLV
Calculating Total CLV for each one of your customers is a powerful way to optimize your business. It will allow you to aim beyond short-term, first-conversion metrics or historical values. Total CLV also provides a new measuring stick by which to understand the success of various strategic initiatives. And it’s the metric your competitors are already starting to use.
If you aren’t already focused on Total CLV, you should be. Take the investments you’ve already made in analytics and data, and expand them to encompass Total CLV — I promise it will help you take your business to the next level.
At Retina, we are the customer intelligence partner that empowers businesses to maximize customer-level profitability. Contact us at [email protected] to learn more about using the power of CLV in your business.