Overcoming the dilemmas of customer lifetime value

Customer lifetime value is a key metric to calculate, but not always an easy one, and marketers may need to compromise in order to make it a business priority.

customer lifetime value clvCustomer lifetime value (CLV) is one of a marketer’s most important metrics. It’s a key measure of not only how well a company is doing right now, but also how well it will be doing in the future.

Trends in CLV can convey all sorts of useful insights into where businesses need to invest to keep customers, as well as how their marketing and business strategies are paying off

But while it’s a crucial number to calculate, it’s also difficult to do it accurately. And efforts to assess customer lifetime value and make it a priority can bring marketers into conflict with their colleagues – and indeed the wider business model.

All marketing is data-driven marketing

To explore and debate the issues that CLV raises, Marketing Week partnered with RedEye to assemble a group of senior marketers for a roundtable discussion focused on the topic.

Even some of the UK’s biggest brands encounter hurdles when trying to assess customer value and what factors can increase it.

As Zoe Harris, CMO of GoCompare owner GoCo Group, said: “For us the challenge is understanding what is driving retention year on year. Obviously we are big above-the-line spenders and it is hard to know when we are, in effect, re-recruiting a customer anew each year, versus someone coming back to us for a second year because of the experience they have had or the way we have kept in touch.”

This can make it difficult to know whether the brand should be investing more in short-term performance marketing or long-term brand differentiation. For example, Harris said that spending on pay-per-click advertising is always likely to generate immediate returns in terms of new customers, which pleases people in the business. However, she acknowledged this amounts to “buying my own customers from Google” and it has longer-term opportunity costs.

“As we all put our money into digital channels and we are all optimising in the same ways, you can prioritise […] getting the customer to do something right now, and you perhaps lose some of your point of difference.”

Discounts are a double-edged sword

A similar balance has to be struck between running promotions and maintaining brand associations. Discounts may help in acquiring and retaining a customer, and can provide a strong incentive for them to provide their data, but while this might help a marketer measure CLV, it may also have the effect of reducing it in the long term by diminishing brand associations and the ability to maintain premium pricing.

“The thing about restaurants is that people don’t tend to come in and tell you who they are, so you have very little visibility,” said Wagamama UK marketing director Andre Johnston.

“As a business that has prided itself on things like no discounting, we end up with limited ways in which we know we can activate conversations with customers directly. Email open rates are really low – and across the industry they’re really low because, post-GDPR, nobody really wants to open an email any more, but also when you’re not actively discounting you end up with challenges.”

RedEye strategy director Roisin Evans said the company has researched the impact of the new GDPR data protection laws on consumers’ engagement with email, and agreed: “The consumer has been more considered about the data they provide and they are thinking more about it rather than just giving the data away.”

However, she added that businesses that focus on sending relevant emails have seen “no impact on unsubscribe” rates, suggesting that there is still an opportunity for brands to use it as an engagement tool to help measure and boost CLV, assuming they can get people to sign up in the first place.

Wagamama is concerned about the “risk” of how discounting “makes your business look and feel over time”, said Johnston, however it has had some success offering a service such as WiFi to encourage email signups.

Disparate data

Just as Wagamama’s decision not to discount may hamper its ability to keep tabs on CLV, but ultimately benefit its business, shaving brand Harry’s has lost some ability to track consumer interactions by growing its distribution from direct subscription into high street retail.

Harry’s manager of commercial strategy and analytics Michael Virk said: “Because we are a subscription company, we do have tonnes of information about our customers and we look at customer lifetime value in a really analytical, scientific way. The challenge for me right now in my role is that we recently launched in Boots, so it becomes a lot more challenging to measure the path to purchase and understand how our customers are shopping both online and in Boots.”

It is hard to know when we are re-recruiting a customer anew, versus someone coming back because of the experience they have had.

Zoe Harris, GoCo Group

While Boots offers a certain amount of insight on customers buying the brand, Harry’s can’t currently identify when a customer is shopping in both channels. For example, he added: “We don’t know if our customers have stopped ordering [online] because they’re going into Boots and buying their razors there, or have they just given up on Harry’s in general?”

Consumer advice brand Which? has had similar issues of linking data, due to the fact it has many different areas of business. But senior marketing manager Charlotte Fitzgerald pointed out that even the ability to make partial links can offer useful insights that indicate a customer’s value to the business.

“We have made the connection between using multiple channels [to engage with us and] an increase in their payout rate month on month, so people who download and use our app are much more likely to stay with us for longer. That was just a data point that we hadn’t necessarily connected before, because we were always thinking about people opening their weekly email.”

She added: “We are taking some reassurance in having a bit of a picture, even if it’s not the full picture, and just trying to do small-scale tests to work out [connections].”

Because she works within a ‘labs’ setting at Which?, her team has the freedom to experiment in these areas before knowing what is going to work.

Organisational culture

As with many of the big questions marketers are faced with today, some of the most significant challenges to overcome are organisational. Nowhere is this more obvious than in the B2B sector, where marketers looking to put CLV on the company’s agenda often have to convince colleagues – particularly in sales – of the benefits first.

Measuring and growing CLV sometimes involves making investments, strategy decisions or process changes that aren’t conducive to making immediate sales. That can create resistance if company boards and other teams need to meet quarterly revenue targets.

Sumeet Vermani, global marketing director of digital marketing and operations at payment provider WorldPay, said: “Our biggest challenge is looking at how we frame customer lifetime value as something that works for our sales teams, because they think about it in a really different way. When we talk about CLV, that’s a very marketing-heavy term and so we are trying to change the mentality and understanding around that so we are looking at share of wallet over time.”

Similarly, at recruitment business Adecco, CMO David Malkinson said “ripping up the rulebook” would be “a very, very brave thing to do that not many people would want to”. Being a transaction-focused business and a Fortune 500 company with a requirement to maintain shareholder value, a wholesale change of priorities would be almost impossible to countenance.

And while measuring and optimising CLV may be marketers’ ideal scenario, some may have to accept that the best way to maximise customer value may be to adopt a strategy that makes it harder to track. Sam Soares, head of digital marketing at cyber security startup CyberSmart, summed this up best.

“Lifetime value is really important for us right now, but is it really what we should be looking at? If we don’t invest in the product now, we’re never going to make it to that [predicted CLV] three or four years from now.

Marketers are forgetting the importance of A/B testing

“So there is a really strong insight-led effort to become a product-led company, where we really focus on the product to deliver value to the customer, and then try to create some kind of loyalty loop so our customers will never leave us.”

The dilemma for marketers is clear. While for many it should be a priority to get their businesses to understand the benefits of driving up customer lifetime value, they will also have to understand that doing what’s in the best interests of the business might ultimately make it more difficult for them to measure it.

But rising to this challenge will enable the best marketers to prove their worth.

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