Few retail metrics are more important than customer lifetime value. It tells us what customers are actually worth over the course of time. But remember: CLV is a forward-looking metric, not to be confused with past profitability. You shouldn’t be as concerned with how much business Jane Doe brought to you in the past, but how much she will bring to you in the future. Why is it so important to focus on customer-centric metrics like CLV and the future value of your customers? Because it is getting harder and more expensive to acquire customers.
Not only is the cost of acquiring new customers rising, their profitability is declining. A Bloomreach study found that 55% of all online shopping searches originate on Amazon.com – up from 44% in 2015. Retailers are fighting over a shrinking pie of addressable shoppers, resulting in soaring costs for search advertising. And a growing number of price comparison and discount search apps are fueling price and promotion sensitivity.
Let’s face it – marketing budgets aren’t growing, which leaves marketers in a very difficult situation. Growth is being squashed, and turnover in the senior ranks is becoming an all too common occurrence. Savvy brands are realizing that growing customer lifetime value is the key to sustainable growth.
If you think about your customers in terms of value-tier segments, you’ll quickly understand the potential effects of acquiring, nurturing and retaining high-value customers.
We recently analyzed the customer data of a large omnichannel retailer. The top 5% of their customer base contributed a staggering 35% of their revenue. The top 20% contributed over 50%. Shifting even 1% of the customers from the bottom tier to the top tier would add 4 percentage points of growth to their revenue, and that is growth that can be sustained year after year.
Another way to think about the importance of CLV is by looking at advertising effectiveness. Let’s say a brand runs ads on both Facebook and Google. The Google ads are half the price of the Facebook ads, and both attract a new customer to your business. The Google ad attracted Christina, and Ben converted through Facebook.
Each spent $100 when they came to your site. Clearly, the Google ad was most cost-effective, right? After all, your return on ad spend for the Google ad is double that of the Facebook ad. Wrong!
Christina is a "one and done" shopper. She spent $100 on your website but never returns. Ben, however, is very loyal. After that first purchase, he returns regularly and continues to make purchases over many years. The investment made to acquire Ben is much more valuable than the investment made to acquire Christine.
So how can you systematically improve your ability to find more customers like Ben, nurture and develop loyalty among your Christinas, and prevent customers from dropping into a lower-value tier or slipping away entirely? The answer requires both strategic focus and deep insights into the behavior of your customers.
Next-generation CRM systems can do much more than house data and enable basic segment creation. Through a combination of machine learning, behavioral modelling and predictive analytics, modern CRM systems can actually understand behavior patterns and predict with great accuracy future actions like CLV, purchase frequency, AOV, product affinities and price/promotion/email frequency sensitivity. These calculations are continuously updated and readily available to anyone in the marketing team at the click of a button.
If you’re lucky enough to have a dedicated data science team in your organization, or if you have the advanced analytical capabilities mentioned above, you’re ready for the four modern marketing strategies for growing CLV across the customer lifecycle. If you don’t yet have predictive analytics capabilities, use these strategies to build the case for investing in them.
1. Acquire customers who will most likely be high in value.Analyze what leads to high customer lifetime value by acquisition channel. CLV is a predictive metric, so simply using purchase history won’t provide the level of insight required. Based on your predicted lifetime value calculations, shift your investments and re-allocate your bid thresholds. You can also use look-alike modeling to find new customers that match the characteristics of your highest predicted CLV shoppers.
2. Convert more first time-buyers.Even after only one purchase, it’s possible to predict the future value of a customer. It’s also possible to predict their product and category affinities. Sounds like magic, but it’s simply the power of data science and advanced analytics. Armed with this information, you can get much smarter about communicating with first-time buyers, tailoring communication channels (and even promotional offers) based on email sensitivity and personalizing messaging based on the products and categories that they will be most likely to purchase in the future.
3. Nurture potential high-value customers to VIP status.Provide special attention to high-value customers long before they cross the purchase threshold. By predicting CLV and identifying these customers early, you can make them feel special without relying solely on additional promotions. Tactics include: early access to sales, product education, special cross-sell bundles and recognition both online and in-store.
4. Intervene when customers begin to veer off track.By predicting purchase frequency and average order value (AOV), you can begin to understand the purchase cycle for each and every customer in your database. With this knowledge, you can move away from rules-based retention marketing programs, such as sending a coupon to everyone who hasn’t purchased in 90 days, and instead intervene at the precise moment that’s right for each specific customer. As they say, timing is everything. If a shopper only buys from you annually during the holidays, providing discount incentives after 90 days won’t be a very effective strategy. But if someone shops every month, a three-month lapse is cause for concern. Building churn prevention models based on predictive behavioral modeling is quickly becoming a popular and effective strategy.
Given the treacherous retail environment today, it’s essential that you look to your customer base to drive your business. Your customers are your best source for immediate growth and the key to increasing profits over the long term. We’ve seen brands embrace these customer-centric concepts and drive dramatic transformations in their business. You can do it, too.
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