A leading footwear brand used customer purchase data in partnership with an external data partner to identify high-lifetime-value customers and the attributes that made these customers different. The brand fed the intelligence into its demand management platform to target “look-alike” audiences, which significantly increased return on ad spend. The brand adapted its strategy to drive short- and long-term results using digital commerce.
Gartner’s CMO Spend survey data showed that senior management has heightened expectations for marketing teams to retain and grow the customer base. Long-lasting customer relationships can yield higher customer lifetime value (LTV) and greater shareholder value through increased purchase frequency, greater loyalty and retention.
“Marketing leaders with digital commerce responsibility are expected to grow online revenue, but they can make a greater impact by creating lasting relationships with high-value customers,” said Jennifer Polk, Gartner for Marketers research director.
Marketers should target growing customer LTV, designing and optimizing digital commerce experiences to grow customer profitability, and using digital commerce to support the full customer journey, often uncovering new revenue streams. To deliver on these goals, marketers need to fully understand the drivers and components of customer LTV.
Define and measure lifetime value to set a baseline
At a high level, LTV will be affected by three components — average profit per customer, active customers and churn rate — measured across the expected customer life cycle.
Customer lifetime value is based on the retention rate of currently active customers and the average profit for each of those customers. You can substitute [1/churn rate] for retention. Churn rate is the rate your company loses customers annually.
To determine the number of active customers, first eliminate duplicates by cleansing and consolidating records. Then combine individual customers at a household or account level and measure past purchases to calculate average purchase frequency. Active customers are those who purchase or engage at or within the range of that frequency
Average profit per customer
Since LTV is affected by costs and revenue, calculate the average profit per customer by reducing revenue by the average customer acquisition cost (CAC) and cost of supporting a customer. The last component is especially important in organizations where marketing has responsibility for customer experience, which can include costs of support.
CAC is based on total media spend, marketing and promotional expenses across channels and sales salaries and commission. Customer support costs include customer service and account management expenses along with the costs of warranties and returns. Include customer advocacy in your calculation. It’s challenging to measure and tie to a specific customer or transaction, but it captures the indirect value of customer relationships.
“Calculate customer LTV for your active customers on the basis of profit, not revenue, to establish a baseline for improvement and enable value-based segmentation,” said Ms. Polk.