Customer Lifetime Value part 1: quality and quantity

It’s a marketing truism that attracting a new customer is a complicated, expensive and time-consuming business. So the ideal scenario is to engage the customers who are more likely to be loyal, first time and every time, for a long and mutually beneficial relationship.

Lifetime Value modelling

It’s a concept known as Lifetime Value (LTV) and, unsurprisingly, it’s been around for many years. What might be surprising is that, until recently, LTV has been largely confined to the direct response field. But as the marketing environment has changed, offering far greater opportunities to deliver the right messages in the right ways to the right customers at the right time, it’s now gaining currency across the mix.

LTV is based on the principle that not all customers are equal. A campaign that generates 1,000 new customers might be judged successful, but if 998 of those only buy once, it’s a game of diminishing returns. LTV changes the paradigm with the understanding that, with a little smart thinking, 1,000 new customers will buy today and over time, as well as welcome interactions with the brand.

Putting the customer at the heart of marketing

Importantly, LTV modelling demands a cultural shift — now the customer must be at the heart of marketing. By engaging with the right customers and nurturing them, a brand enjoys increasing returns. The shift to LTV may be ‘cultural’, but the benefits are comfortingly empirical. A brand:

  • establishes the value of different sales channels – irrespective of whether it is new customer acquisition or cross selling;
  • justifies and tracks investments in, for example, customer retention initiatives vs control cells;
  • designs and tests different marketing and media plans more effectively;
  • drives ROI from marketing spend as well as activities such as customer service, discounts and product ranges;
  • creates more meaningful and customer-centric KPIs; and
  • improves satisfaction by ensuring marketers engage with customers who have a long-term interest in the brand.

So if it’s so easy and delivers such an obvious benefits, why isn’t everyone doing it? As with any new way of working, there are some big pitfalls for the unwary:

  • Value of money: future value not only has to be predicted but discounted to the current value of money.
  • Net, not gross: it’s critical that LTV is measured at the net profit level, but some models use gross margin or, even worse, revenue.
  • Sound data: if data about the nature of customer relationships — such as the number of service centre contacts, returns, complaints, etc — isn’t available, then the LTV model can be distorted.
  • Bigger picture: LTV has to be more sophisticated than something that just identifies the most valuable customers. Instead, brands also need to look at other customers to see how they can be moved up the value chain, from ‘one-off’ to ‘lifelong’.
  • Dynamic: LTV is a journey, not a destination, and so strategies need to evolve rapidly if they are to keep pace with changing conditions.

In my next blog post, I’ll look at how Experian’s marketing and data expertise turns LTV modelling from a concept into a reality.