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The Real Value of Lifetime Value

  |  January 11, 2012   |  Comments

You need to know what an average customer and a good customer are worth to your business in order to find, secure, retain, defend, and grow your customers.

It's one of the first questions we ask almost every client - "What is the value of a customer to you?" Only a small percentage of otherwise sophisticated clients can muster an answer. Most of even those who do answer are simply estimating based on a guessing game in which our team plays game show host. Would you consider an acquisition cost of $X to be a win? Why? If you don't groom your clients at all, what is their spend rate per year? If you do communicate with them, does it increase? By how much? What can you tell me about the different kinds of customers you service and their impact on your profitability? How has this changed over time? The list of questions can go on forever.

It's not just an issue for e-commerce marketers. All marketing has the ultimate goal of finding, securing, retaining, defending, or growing the value of customers. This holds true whether or not you get the immediate feedback of an online sale or are tracking leads from a long-term, considered purchase online or off. It seems self-evident that you would need to know what an average customer and a good customer are worth to your business to have any hope of logically planning your marketing strategy and expenditures toward increasing that value. With all the talk of metrics and ROI in digital marketing, this basic but critical information seems to be missing far too often, resulting in lots of measurement and little logic in the decision-making those metrics are intended to support.

Let's take a look at the impact of marketing informed by lifetime value (LTV) across a spectrum of marketing goals.

Finding Customers

New customer acquisition is not about gaining new customers at any cost. It is about finding those customer segments that bring long-term value and profit to your business and that can scale sufficiently to support your short- and long-term goals. Certain channels, messaging approaches, and media plans return those right customers. Knowing how to define them is the starting point for a deliberate, sustained testing program that will continue to refine your approach and results.

Securing Customers

For most categories (that aren't insanely loyalty bound), you can create trial with new potential customers if you offer a new or intriguing experience or if you discount deeply enough. Sure, some customers will never pan out or will only buy on promotion, but some may become good customers if you continue to offer them a good value and a good experience. You need to be able to model out the expected long-term return on that discount-driven customer in order to justify the investment in what could be a negative margin initial sale. A key input in that calculation is the value that the customer is likely to provide over their life.

Retaining Customers

Long-term customer relationships are about brand-building and relationship-building activities that reinforce the value you provide customers and remind them you exist and can fill a need for them. More valuable customers should be provided with more value, more often. That value can be delivered in many forms including increased or priority access, special content or tools, or many other perks such as price incentives or rebates. All of the monetary and non-monetary value that you provide costs money and it's impossible to know how much it makes sense to invest if you don't know the value of your customers.

Defending Customers

The flip side of retaining customers is competitive defense. All customers have a choice and will be presented with other attractive options unless you are in a monopoly business. Stay focused on retaining those customers, especially the more valuable customers that were so hard-won. Knowing the lifetime value of your customers will help you plan your response should an aggressive competitor come into your territory. Are they after your prime customers or the marginal ones? You won't know what to counter with or what level of spend makes sense in response unless you know your customers' value, preferences, and responsive areas.

Growing Customers

The definition of a good customer is going to vary widely by company, category, industry, segment, maturity, and many other factors, but all other things being equal, we definitely want customers who buy in greater quantity or more frequently. We also want those customers who spread positive news about us. Through social media and other digital measurements, we can track how frequently customers engage or interact with the brand, how often they recommend the brand, or the scale of their sphere of influence.

Growing customers across any of these measures takes time, resources, and investment and can shift the way you might determine the LTV of a customer. Should you invest in growing a customer from a once-a-month buyer to a twice-a-month buyer or instead invest in grooming all buyers who have broad influence and/or are strong advocates in social media? The power of social media has changed the metrics that define LTV forever.

Despite all our cross-channel tracking capabilities and optimization proficiencies, LTV remains an elusive, if critical data point on which vital decisions depend. It's not easy and it's not a one-and-done proposition, but if you can't articulate what your customer is worth to your business today, then you won't know how to build, defend, or grow your business.

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ABOUT THE AUTHOR

Robin Neifield

Robin is the CEO and cofounder of NetPlus Marketing Inc., a top 50 interactive agency established in 1996 to focus exclusively on online marketing and advertising best practices. Robin brings innovative strategy and a depth and breadth of marketing experience to the agency's practice and management. As one of the industry's pioneers, she is a driving force behind NetPlus Marketing's ongoing success with a diverse and discerning client base that considers online results critical to their business success.

Robin is a frequent speaker at national industry events, including ClickZ, internet.com, OMMA, Ad:Tech, SES, Online Marketing Summit, and Thunder Lizard conferences and is a sought-after resource for industry and business publications for her insight and advice on such topics as digital strategy, social media marketing, and behavioral targeting.

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