Measure Lifetime Value to Clarify Business Impact
Marketing can show impact on business growth and profitability by linking operational metrics to customer lifetime value.
Contributor: Heather Levy
Nicolas Chu, president of Orbitz-subsidiary HotelClub, outlined one of the key challenges in customer acquisition when he noted, “You can spend $2 to get $1 back online because you know that in six months’ time, you’ll get more than that back and have customers spending more with you over time.” Unfortunately you can also spend $20 for an unprofitable customer. Marketers need to stop overspending to acquire unprofitable customers because their metrics don’t take into account the entire customer life cycle.
“Marketers should identify the operational levers that have the greatest impact on lifetime value (LTV) and customer acquisition cost (CAC) and think about metrics along the entire customer life cycle that marketing can impact,” said Kirsten Newbold-Knipp, research director, Gartner for Marketing Leaders. Three actions related to lifetime value measurement can help marketers drive more growth and profitability.
Segment your client base to identify the most profitable customers and use analytics to learn how to get more like them.
Clarify value and cost drivers
The first step in moving from a day to day, head’s down posture to seeing the lifetime value forest through the trees is to identify the operational metrics that impact your organization’s customer lifetime value. While the buying journey of today makes the sales funnel of old obsolete, the steps in the process still happen only according to the customer’s timetable. Even within this new circuitous buying journey there are four categories available for marketers to organize impact on LTV/CAC: cost to acquire, lifetime revenue, cost to support and retention metrics. The next step is to prioritize which metrics matter to the business and which ones marketing can influence.
Prioritize by impact and influence
After developing the long-list of operational metrics that drive LTV, segment your client base to identify the most profitable customers and use analytics to learn how to get more like them. Distill the list of metrics based on impact on lifetime value or acquisition cost as well as ability for marketing to influence those levers. The team at HotelClub was surprised to discover the segment of customers coming from their affiliate channel had fewer repeat purchases and was ultimately more inefficient from a LTV perspective. Even for customer service, where marketing is not leading the effort, marketers can identify campaigns or channels that produce unusually high (or low) service costs.
A relentless focus on LTV can lead to skyrocketing acquisition costs in trying to acquire the “perfect” customer.
Apply metrics to all marketing decisions
After identifying the right metrics and prioritizing a shortlist, it’s time to bring the power of lifetime value to life. Seek areas where marketing can make an impact such as:
- Marketing mix: What channels and sources can land more profitable customers?
- Promotions: Which promotions attract better, higher-quality customers?
- Merchandising: Can better merchandising deliver higher satisfaction for first time buyers?
- Retention: Can you optimize acquisition spend to bring in more repeat buyers?
One closing but important note: Be mindful of balancing LTV and CAC – a relentless focus on LTV can lead to skyrocketing acquisition costs in trying to acquire the “perfect” customer and driving CAC down too much can deliver lots of unprofitable customers. It’s this very balance that makes LTV:CAC an excellent executive-level metric because marketing can show progress toward business goals from an operational perspective.
For more Marketing related articles visit Smarter With Gartner website.