Customer lifetime value and the demise of ROI
Brands in all industries are reappraising what success looks like and how to measure it. For marketers, this means taking a more holistic view of customer relationships and starting to think beyond the immediate sale.
With so much choice on offer, CLV has never been more important. / Photo by Bodie Pyndus on Unsplash.
Customer Lifetime Value (CLV) has become an integral part of this evolution as conventional methods of evaluation, focused solely on the immediate sale, fall short on a key measure: what’s the customer’s overall value to the business? The growth of Software-as-a-Service (SaaS) and subscription-based delivery models is contributing to this sea-change and businesses are focusing less on one-off sales (or even loyalty), and more on a broader perspective that paints a complete picture of every customer.
The benefits of taking this wider view are well appreciated by marketers. Our research revealed high awareness of CLV (82%), a strong willingness to make it part of their approach (92% said they monitor the metric) and recognition of its strategic importance to their organisation’s marketing strategy (98%). Not a single marketer we’ve spoken to said it wasn’t important. The tide is clearly turning.
But while there’s strong evidence that marketers are working hard to measure the value of their customers in this way, there’s still a way to go.
The death of ROI?
CLV isn’t the only metric in town. Longstanding measures such as ROI, CPA, COS and many others besides have made up the marketer’s arsenal. However, these metrics have only ever provided part of the picture of customer-centric marketing’s impact.
As a result, there’s been an ongoing measurement conundrum as brands try to devise long-term campaigns using short-term metrics. To do this, ROI has traditionally been able to effectively analyse the immediate monetary value delivered by a campaign, but has fallen short when it comes to helping marketers make the best ongoing decisions. Afterall, a single sale might have cost the business one amount, but its success over a longer period of time often goes unknown.
Enter CLV. Accounting for wider spending habits and behaviours, it represents a superior metric for assessing long-term profitability over one-off buying activity. The measure allows brands are able to proactively assess whether new customer acquisition makes long-term business sense versus the short-termism of ROI. While the two are not incompatible or mutually exclusive, ROI should be captured so as to reinforce CLV as the primary measure of customer engagement.
What’s more, this mode of measurement enables brands to make more informed decisions about how to make the most of existing customers, demonstrating where marketing budget would be wisely invested and indicating where further profits are to be made.
Much more than that, savvy marketers are able to use CLV measurement to identify where retention and sales value among existing customers can be improved, further boosting their CLV and freeing up more spend to be used elsewhere in their marketing strategy.
Misplaced faith in loyalty?
Brands often obsess over loyalty and not without due cause; what better compliment for your product or service than customers coming back time and time again? It stands to reason that businesses should seek to encourage repeat custom, supported by a deeper – though less tangible – sense of goodwill around how they perceive and interact with your brand.
But loyalty and value are not the same thing and brands should look to apply more sophisticated metrics to their customer engagement than simply ‘coming back for more’.
CLV is more powerful than loyalty as it provides a more accurate measure of true value. Would a business prefer a customer that buys frequently and at high volume over a three-month period, or one that makes intermittent, low-volume purchases over a three-year period? It’s distinctions like this that CLV helps to manifest.
Breaking down barriers
CLV, then, is a powerful metric. So why isn’t everyone using it? The short answer is that getting it right is complicated.
One of the main challenges is getting buy-in from the business and breaking down internal siloes. CLV requires a shift from a tactical sales approach to a longer-term, more strategic perspective, but getting other senior stakeholders to feel comfortable moving away from traditional metrics, this can be difficult. Marketers need to find a way to clearly communicate the value CLV can bring to their business.
Data acquisition and associated analytical skill sets are also holding back CLV adoption. Implementing CLV effectively requires a data-led approach that can attribute sales correctly and track consumers across devices, and as many of 40% of brands lack these skills in-house. However, marketers who have access to the right technology and skills, whether in-house or outsourced, stand to benefit greatly.
In an age when consumer choice is greater than ever and customers are only ever a discount away from shopping with a competitor, CLV represent a clear opportunity for strategic clarity that is too good to pass up.
In today’s data and analytics-driven world, brands know that ROI as a standalone metric for success is no longer fit for purpose, and with customer behaviour and spending patterns predictably unpredictable, modeling all elements of customer interactions needs to be dynamic and adaptable. CLV is all of these things and holds the key to identifying the full potential of customer relationships.
Elizabeth Brennan is director, account strategy and sales, UK at Criteo
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