Customer Lifetime Value: The Core Metric in Marketing
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How to use data and lifetime value to maximize the ROI on your marketing spend. Out of all the metrics that we monitor in our business, there is one that captures the heart, soul, and ROI of our efforts: lifetime value (LTV) of our customers. The measurements of digital marketing have evolved dramatically over the years from CPM to CPC, CPA, CPI, and more. The next phase, and perhaps the most important, is calculating LTV. Few are taking the leap to position this metric as the core KPI of their marketing teams’ success. But the reality is, the moment your competitor starts to figure out LTV and you can’t, you’re dead. In this session, Ben outlines best practices for developing the strategy necessary to undertake calculating lifetime value to better understand your customers and the essential analytics you need so you can boost your ROI.
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Customer Lifetime Value: The Core Metric in Marketing
- 1. Customer Lifetime Value: The Core Metric in Marketing! How to use data and lifetime value to maximize the ROI on your marketing spend! Ben Legg, CEO Adknowledge! @bglegg! @adknowledge!
- 2. The Digital Marketing Landscape is Overwhelming…! 2! Customer Lifetime Value: The Core Metric in Marketing! Data Source - Gartner!
- 3. Which Adtype Should I Use?! 3! Customer Lifetime Value: The Core Metric in Marketing!
- 4. Where Should I Show My Ads?! 4! Customer Lifetime Value: The Core Metric in Marketing!
- 5. How Can I Track and Analyze Users?! 5! Customer Lifetime Value: The Core Metric in Marketing!
- 6. What Should I be Measuring?! 6! Customer Lifetime Value: The Core Metric in Marketing!
- 7. Who can help me?! 7! Customer Lifetime Value: The Core Metric in Marketing!
- 8. 5 x 1028 Potential Ad Permutations! 8! Customer Lifetime Value: The Core Metric in Marketing!
- 9. ROI: Customer Lifetime Value! 9! Customer Lifetime Value: The Core Metric in Marketing!
- 10. ‘Two-Thirds of CMOs believe ROI is the primary measure of effectiveness. But half of all CMOs feel insufficiently prepared to provide hard numbers.’! ! - IBM CMO Study ! 10! Customer Lifetime Value: The Core Metric in Marketing!
- 11. Cost to Acquire a Customer Will Keep Increasing ….! 11! Customer Lifetime Value: The Core Metric in Marketing! Source: Sean Ellis, Startup-Marketing.com!
- 12. Lifetime Value (LTV) – The Core Metric for Marketing! 12! Customer Lifetime Value: The Core Metric in Marketing!
- 13. Traditional Measurement of ROI! Transactional View! Spend per order! $ 15 ! Cost per order! $ 8 ! Profit Per Order! ! $ 7! ! 13! Customer Lifetime Value: The Core Metric in Marketing!
- 14. We Eat Pizza More Than Once...! The LTV is the amount of profit you make from a typical customer over the entire lifetime of your relationship! Customer Lifetime View! ! ! Spend per order! $ 15 ! Cost per order! $ 8! Profit per order! ! $ 7! ! Number of Purchases per Year! 12! Average Lifespan of Customer! 5! Cumulative Profit! $420! 14! Customer Lifetime Value: The Core Metric in Marketing!
- 15. Question:! If you were Dominos, what would you rather spend to acquire new customers?! A $ 50! B $ 150! C $ 300! 15! Customer Lifetime Value: The Core Metric in Marketing!
- 16. All Pizza Munchers Are Not Created Equal! MR. BESTEXAMPLE! ! MR. AVERAGE! MR.NEGATIVE! Average Order! Cost Per Order! Profit Per Order! Purchases Per Year ! Lifespan of Customer! Lifetime Profit! Acquisition Costs! Profit Per Consumer! ! * Churn plays a huge factor as well. ! ! ! ! ! $ 22.50! $ 12.50! $ 10! ! 26! 10! ! $ 2,600! $ 300! $ 2,300! ! 16! Customer Lifetime Value: The Core Metric in Marketing! $ 15! $ 8! $ 7! ! 12! 5! ! $ 420! $ 150! $ 270! ! $ 12! $ 7! $ 5! ! 3! 1! ! $ 15! $ 50! $ -35! !
- 17. LTV – for Loyal Customers of Key Brands! LTV helps marketers understand:! How much their customers spend! How often they spend it! What campaigns motivate buyers to become customers for life.! $ 8,000! $ 11,535! $ 332,000! The LTV metric shines light into marketing’s biggest blind spot—the junction where long-term value begins to outpace short-term gain! Sources: Service Profit Chain, KISSMetrics! 17! Customer Lifetime Value: The Core Metric in Marketing!
- 18. What are the Barriers to LTV?! If LTV is critical why aren’t more marketers doing it?! Lack of Awareness! Higher barrier to entry! Difficult to calculate ! Time pressures to show results quickly! 18! Customer Lifetime Value: The Core Metric in Marketing!
- 19. Think Big. Start Now. Scale Fast.! • Data Inventory! • Data Collection! • Data Hygiene! • CRM Database! • Segment! • Understand! • Message! • Optimize! 19! Customer Lifetime Value: The Core Metric in Marketing! • When you find something that works - uncap your budgets!!
- 20. Plan: Your CRM Database is Critical to Success! 20! Customer Lifetime Value: The Core Metric in Marketing!
- 21. Test, Test, Test… ! 21! Customer Lifetime Value: The Core Metric in Marketing! 1 Segment! 2 Understand! 3 Message! 4 Optimize!
- 22. Case Study: Jackthreads! OBJECTIVE! Attract new users and upsell existing members! Extend your strategy further 22! Customer Lifetime Value: The Core Metric in Marketing! by integrating your data to APPROACH! new platforms! • Strategy included using domain ads to target new members! • Used email profiles to develop custom audience! • Used broader list for Targeting ads, Page Post ads & Promoted Posts in the newsfeed! RESULTS! • 72% match rate using custom audiences! • 1/5 of more than 2.5 million members were acquired through ads on Facebook! • 30% lower cost per acquisition for new member sign-ups than other advertising channels! • 6X return on advertising spend when using Custom Audience Targeting together with Facebook ads!
- 23. Scale Fast! 23! Customer Lifetime Value: The Core Metric in Marketing! “Houston, we have uncapped the budgets!”!
- 24. Marketing is all about Creating Value! LTV provides the means to create shareholder value! 24! Customer Lifetime Value: The Core Metric in Marketing! SHAREHOLDER VALUE! High Value! Mid Value! Low! Value! AVERAGE! NUMBER OF CUSTOMERS! LTV! SOURCES OF VALUE CREATION!
- 25. ! Questions?! dmexco@adknowledge.com! 25! Customer Lifetime Value: The Core Metric in Marketing! www.linkedin.com/company/adknowledge! 1.816.931.1771! @adknowledge!
Editor's Notes
- The problem with acquiring new customers isn’t getting any easier No more low hanging SEO Quality clicks can be expensive Competition for key words is fierce Cost of acquiring an online customer today is X vs Y (getting data) The more leads we must generate the more money we must spend, but as we compete for the same customers the cost to acquire goes up. LTV can help answer three fundamental questions Are you growing and maintaining profitable customer relationships? Are you acquiring the most profitable customers? How much should LTV can help answer three fundamental questionsGrowing and maintaining profitable customer relationships is critical to the success of any business A firm’s profits can skyrocket one year, but if the co. does so at by alienating the most valuable customer base the business can not succeed (cue bad joke about JC Penney!)
- Most important metric to help make sense? Lifetime Value (LTV) Talking Points Marketers are collecting more information about their customer base than every before Common Measurements – CTR, Visits/Visitors/Bounce Rates/Conversions LTV most helpful metric but often most overlooked The lifetime value of a customer is the present value of the projected future cash flows from that customer relationship. Once you know how much the LTV of the customer is you can determine how much you are willing to spend to acquire that customer customers buy more when they stay longer with a company and become more comfortable doing business with it. However, increased competition over time, as well as a changing customer mix, combine to reduce margins. The customer mix changes because a company starts by attracting profitable customers and later adds less-profitable customers.
- Lets use a very simple example Pizza… DOMINOS PIZZA. OLD SCHOOL – ONE TRANSACTION AT A TIME. WORLD INVEENTED BY GOOGLE Every marker knows that they should be focused on retaining customers, but few take the time to measure it. If modeling ROI means calculating initial sales relative to marketing costs rather than looking at the value of that customer over time – the marketer is missing the big picture. WELL WHAT IT IS WORTH WHO HAS NEVER HAD AN AP ON THEIR PHONE DOWNLOAD THE PHONE AND NEVER USES IT.. OR USES OR USES IT AGAIN. Issue: Snapshot Doesn’t show longer term value
- Change brand of boxes.
- Add line on profit Purchases Per Year Average Order Profit per order -- Total Revenue Average Copsts Proftits per segments
- LTV gives you an idea of how much repeat business you can expect from a particular customer which can help you understand how much you are willing to spend. E.g If you don’t know LTV how do you know if you are spending your marketing and sales dollars acquiring and retaining less profitable (or worse unprofitable!) customers The LTV of a customer is much more than what you might expect…. Starbucks --- $11K -That is why they are able to spend money on fancy couches and free wifi
- Lack of Awareness It’s a common misconception that LTV is impossible to calculate. The fact, however, is that the process requires continuous experimentation. CMOs, CIOs, and CFOs need to come together to build, test, and refine unique quantitative models. This process takes time. And we’re not talking weeks or months; developing a true understanding of LTV can take years. 2 High Barrier to Entry How do you even begin to quantify a concept that is so ambiguous, expensive (IT costs, data purchasing, manpower, etc.) and time consuming? It’s this question that stops marketers from even beginning to tackle the challenge. The path between instant gratification (e.g., driving single sales) and LTV will be bumpy. It will lead your marketing team to more dead ends than you’re probably used to. Is this journey worth it, when your bonus is paid based on quarterly or annual achievements? If you’re reading this blog post, you can probably guess that my answer is YES. However, many marketers can’t seem to reconcile the effort required to power through the journey. 3 Need for Quick Wins Given the rapid change in the definition of marketing, a CMO—on average—is currently lasting less than three years on the job before being fired or headhunted. Therefore, as this (measuring and driving LTV) might take more than a few years to prove itself, it won’t help the CMO to keep a job or get promoted in the short-term. CMOs won’t want to start processes they can’t finish. They need to show results now. They don’t have time to wait, experiment, and craft complex mathematical models that show progress over time. They don’t have, well, a lifetime to calculate lifetime value.
- Step #1: Get Buy-In Convince your CEO, CFO, and CIO to commit to measuring and driving LTV for the long-term. This cross-functional senior alignment will help with resource allocation and organizational focus. The digital advertising world is becoming increasingly complex. Actually, that’s an understatement. The online advertising landscape is painfully cutthroat. Take a concept as simple as cost-per-click (CPC), for instance. Advertisers are constantly looking for ways to outperform their competitors. If you’ve run a PPC campaign, then you probably already know this; your brand’s ability to compete will sometimes come down to half a penny. At scale, these CPCs amplify to become millions of dollars in marketing spend. If you can’t compete by half a penny, you start losing share. Performance marketers are religious about monitoring spend relative to ROI. It’s their margins—not the advertising marketplace—that determine whether they’ll be game to ramp up their spends. The advertisers who are backing out their spends to an LTV measurement have significantly more wiggle room than the ones looking through a pure direct response lens. This competitive edge directly affects the advertising ecosystem by ramping up the costs of customer acquisition. Over time, as companies become more sophisticated in tracking LTV, the marketers who aren’t will be forced out of performance advertising markets. Budget-strapped marketers will find themselves in a chokehold, pinching pennies in a way that inhibits them from fully pursuing valuable customer opportunities. Revenues will suffer. Meanwhile, the companies that are measuring LTV will have the flexible ad budgets to acquire users, and sustain profits, for the long term. You see where this is going, and this logic should help you to gain buy-in. Step #2: Build the Data Infrastructure Start with inventorying your customer data. Determine, 1) what you can use now and, 2) what you need to improve upon. Key questions include: What customer email addresses do we have now? Are they “live” or lapsed? Do we have permission to send emails to them? What do we know about their demographics? If nothing, you can work with third party data companies (such as Experian) to learn more about them (age, sex, household income, marital status, etc.) Can we link those email addresses to their past purchases? This enables a level of segmentation that, for instance, allows sending a different message to lapsed customers versus high-spending ones. Do we have other customer data, like mobile app logins or Facebook fan data?
- Take note – Email is still the 800-pound gorilla Although not perfect yet, once you have a more unified view of each consumer (centered around an email address) you can start to track how much you spent marketing to them, and how much you engaged them and persuaded them to spend money with you. To maximize engagement with your customers, you need reach them across touch points – online, mobile and in-store – with an integrated customer experience where the actions, promotions, and rewards within the program mesh seamlessly with how and where your customers choose to interact with the brand. E-mail has a history of being one of the highest ROI channels for advertising. Let’s go back ten years. While Adknowledge had a database that allowed for fairly granular consumer targeting, most brands were unable to zero-in on their prospective customers. Five years ago, some e-mail marketers started catching up and could experiment with basic interest targeting. But over time, email lost its appeal. The channel became synonymous with spray-and-pray spam. Consumers put on their filters, complained, and pushed unsubscribes to a collective record high. At Adknowledge, we have always taken a different, more responsible path. When targeted and correctly managed, we believe email is not only relevant, but is a magic marketing pill. Here’s why: Unified View of the Customer The email address is the primary way to identify a consumer, to be used as the core of a “unique identity” to which all other customer data points can be added and/or derived. For example, if a consumer logs into your mobile app with his email address, you can combine your mobile data about that consumer with your existing data. P ersistence Unlike other forms of user identification (e.g. cookies) which deteriorate pretty quickly, email addresses remain valid until a consumer stops checking it, which is typically years. This means that an email database will retain its size and freshness for much longer I ntegrated Messaging We can also take our email databases to deliver highly personalized, high-touch, cross-platform experiences. We can segment our users based on historical behavior, which means that we can reach them with the right message, at the right time, on the right platform. You can also target them beyond a mere email; for example, Facebook’s “Custom Audiences” allows targeting of ads to consumers based on their email address. I ntegrated Measurement
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