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The art of measuring a customer's lifetime value

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24th Jul 2014
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Measuring a customer’s lifetime value (CLV) is a challenge for any company. CLV represents a customer’s total worth to a business over the entirety of the relationship and the task of measuring it is essential to the health of any business or organisation intending to grow. Many formulas and models for measuring CLV exist, and although these may help marketers reach a definitive figure, they very much depend on figures associated with the organisation rather than the entire sector.

According to research by Sitecore, more than three quarters (76%) of companies either agree (25%) or strongly agree (51%) that CLV is an important factor to their organisation. Yet, only a tenth (11%) strongly feel that they are able to measure it.

In this article, I will examine the key elements that marketers must take into consideration in order to obtain an accurate measure of CLV and gauge the tangible loyalty of their customers.

Targeting the influencers

Knowing who to target is vital for companies when it comes to measuring CLV. The ‘Influencer’ is an increasingly important customer segment which brands must connect with if they hope to expand CLV and attract new respondents. It has been found that seven to 15% of any company’s customer-base is made up of this type of consumer, and while calculating this group’s CLV may produce a less than desirable sales figure, (they often require investment in communications and aftersales care, outweighing any immediate financial gain) their lifetime value is greater when brands consider how much value they generate through others.

The ‘influencer’ is someone who is delighted by and passionate about their experience with a brand. Typically a frequent user of customer services, they share their good experiences via their social media channels and with a small inner circle of people who will generate profit.

The loyalty paradox

Thanks to the advent of digital, CLV now starts from the moment a customer comes into contact with a brand, and more often than not, this is on a business’s website. Pin pointing the start of a customer’s journey enables a company to follow every touch point thereafter, join the dots and deliver appropriate interactions where necessary.

A loyalty programme can be effective if a customer visits a brand’s site regularly as the mining of data can be used to ‘reward’ customers for returning. If a brand tracks their journey while on their website, they can see what products customers are more interested in, what they bought previously and what they might be looking for on this occasion. Interestingly, the research showed the respondents who work for an agency believe loyalty programmes are the best way to increase CLV.

Pricing Strategy

With so many companies concerned about measurement, it stands to reason that brands are keen to entice customers into long-term subscriptions. The move to a subscription model changes the nature of a brand’s relationship with a customer and enhances the opportunity to increase their ‘value’ to the business. Brands that encourage customers into these strategies do run the risk of irritating them, as many try and stay away from long term contracts to avoid having to a pay a heavy ‘get-out’ fee mid-way through their commitment period. Only 15% of the companies involved in the research were found to use this pricing tactic, and those were mainly from the leisure or telecommunications industries.

This kind of practice is common place in these industries in particular, with gym memberships and phone contracts demanding customers sign up for a 12, or sometimes 24 months, minimum term.

Opportunities

Understanding when to up-sell and cross-sell to existing customers can be a tricky task for any business wishing to expand their existing customer database.

By monitoring a customer’s purchase history, brands can determine when they are likely to spend more money, for example, when they get paid at the end of the month, and offer deals that will encourage them to buy more on those occasions.

An example of this is a clothing retailer using insight to coordinate email marketing to highlight ‘new lines’ and discount codes to customers, including expiry dates, at the most timely and relevant occasions – i.e. close to pay day.

Facing the challenges

A common problem companies encounter when measuring CLV is deciding which department should take responsibility for it. While businesses recognise the importance of different techniques and tools for maximising CLV, as outlined above, basic organisational skills are often of equal importance in helping businesses to fulfill their full potential. Closely linked to organisational change is a lack of system integration. 41% of the respondents in the study note that poor integration of systems is hindering customer experience and just over a quarter of the B2B companies involved thought their systems are not up to the task of keeping customers happy.

In short, one size does not fit all when it comes to measuring CLV and instead of outlining one specific approach; marketers are better placed considering many different methods. Understanding every aspect of a customer’s journey with the business and offering them a personalised service will make them feel valued, and appreciated.

Adopting these intelligent processes of measuring CLV means it doesn’t matter what stage a customer is at on their journey with a business, marketers can make a significant impact to CLV.

Click here to download ‘Customer Lifetime Value: Building Loyalty and Driving Revenue in the Digital Age’ joint report from Sitecore and Econsultancy.

By Shawn Cabral, VP Corporate Marketing, Sitecore

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