How to Capitalize On Customer Lifetime Value Intelligence
Customer Lifetime Value is perhaps the most powerful and far-reaching tool in a brand’s toolbox. Customer lifetime value (CLTV or often CLV), lifetime customer value (LCV), or life-time value (LTV) is a prediction of how much a customer is actually worth to a company and therefore, how much money should be spent on acquiring said customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques. CLTV is used in strategic and marketing planning and enables a brand to be alerted to trends that will positively or negatively impact the brand.
Customer Lifetime Value (CLTV) is often used to understand the current value and to forecast the future value of:
- Customers
- Prospective customers
- Active categories
- Adjacent categories
- Channels
- Occasions
- Segments (if segmentation has been used)
In this article we explore how to utilize CLTV intelligence.
Customer Acquisition and Retention
CLTV provides insight into the value of acquiring and retaining customers. It helps brands decide what to spend on customer acquisition. If a brand is in the dark about how much money customers are generating, then they are only guessing as to what the optimal spend would be on customer acquisition to ensure profitability.
When CLTV is coupled with segmentation, brands can do lookalike modeling acquire similar high-value customers. CLTV encourages marketers to focus on the long-term value of current and potential customers instead of investing in acquiring customers for a short-term win. Rather than thinking about how you can acquire a large amount of customers and how cheaply that can be done, CLTV helps calculate spending on acquiring customers for value…rather than focusing on low cost.
As customer retention is less five to seven times less expensive than customer acquisition, one of the best ways to increase CLTV is to invest in retention and finding ways to reengage customers. CLTV helps to reduce churn rate and increases ways of getting customers to come back, including upselling. It also assists in deciding which channels are most effective to optimize marketing investment/budget.
Reduce Customer Churn
CLTV tells a company if they can expect customers to become repeat customers. If the CLTV is high, the customers are probably happy with the brand and will likely buy more. CLTV allows a brand to identify and focus on the “fans of the brand,” and find ways to interest these customers into buying more. Brands can also act proactively by identifying customers who are most likely to churn.
Demand and Sales
Once the CLTV of a brand is known, predictions of the future demand can ensure enough products are available to meet the demand. A business can also ensure that they do not acquire too much inventory. CLTV is a great way to plan cash flows regarding how much product will be needed in the short and long term and assists in budgeting. Budgeting, in terms of how much you spend on retaining and acquiring new customers.
Communications
Brand communications can be optimized by ensuring that most profitable customers, categories, channels, occasions, and segments are targeted using CLTV. CLTV is a good way to select customers and for making decisions regarding how to communicate with them. This works for acquiring new customers and retaining the best customers. It also is helpful in deciding the best communication/relationship systems to stay in touch with the most profitable customers or segments. You can deliver targeted content and personalize the messaging for each stage of the customer lifecycle.
Focusing Business Strategy and Tactics / Customers Are Not Equal
When calculating CLTV, customers can be identified as high value and low value. High value customers can be targeted. CLTV also assists in finding out which channels are working, and which ones are not working. Efficiencies are increased, as different channels are refined or abandoned in terms of what is effective with different segments of customers. Customer loyalty is important and selling more to repeat customers will bring in more profits. CLTV also helps you to identify new high value customers and predict which segments will be most profitable in the long term.
Value a Business
If a brand is looking to sell or expand, CLTV is an invaluable tool in being able to provide the current and future value of a brand. CLTV is powerful in communicating this information to an investor and can excite and show how the brand is succeeding now and into the future. It must be noted however that Customer Lifetime Value is a dynamic concept and is influenced by changes in marketing effectiveness and other changes in the market. When used effectively, a Brand can increase profits by spending marketing dollars in a more strategic manner using CLTV.
Customer Lifetime Value
CLTV economic analysis is usually based on survey data as well as data provided by a brand; however, it is also possible to model CLTV using sales and other company data without the need for a survey. CLTV is versatile and powerful intelligence for any brand.
Janene Forman is a Research Analyst at Q2 Insights, Inc., a research, and innovation consulting firm with offices in San Diego. Kirsty Nunez is the President and Chief Research Strategist at Q2 Insights. If you would like to learn more, please reach out to Kirsty at (760) 230-2950 ext. 1 or kirsty.nunez@q2insights.com.
