Marketing leaders spend a lot of time thinking about the economic impact of marketing on their business. Are your marketing campaigns targeting the right customers? Has the customer relationship paid off in the long run? And, most importantly, are you hitting your new revenue growth goals?
[Editor’s note: The CMO Council, in partnership with Deloitte Consulting LLP, produced a report on customer lifetime value analysis, based on a survey of 150 global marketing leaders and in-depth interviews with several company executives. We have compiled some excerpts and shared them with you.]
Linking marketing efforts to financial results isn’t easy but rethinking an old marketing metric can help pave the way. We are talking about Customer Lifetime Value, or LTV (Customer Lifetime Value) , which predicts the revenue from future relationships with customers. There are many opportunities for marketers to improve LTV. Just take a look at the key findings in our report:
- 47% of marketers rate LTV tracking “slightly better” or “not at all”
- 68% rated their CAC/LTV ratio as average, below average or very poor
- 44% of companies are “slightly effective” or “ineffective” at segmenting and targeting customer segments with the greatest long-term value potential
A redesigned LTV reflects the new digital reality and empowers buyers, giving marketers greater insight into valuable customer segments and the activities that truly impact the customer experience. This enables CMOs to design more effective and efficient marketing mixes.
However, for LTV to be truly insightful, marketers must redesign it to reflect the relationship between digital customers and companies. This formula must take into account a range of factors, including customer segmentation, psychographics, discount rate, acquisition cost (CAC), retention cost, churn rate, revenue per user, transactions per user, business metrics, brand health metrics, penetration frequency and publicity.
In other words, LTV is not a one-size-fits-all metric, nor is it a quick fix. It requires the commitment and ongoing engagement of executives across the company. LTV must continue to be redefined over time to reflect constantly changing markets, products and buyers. But the payoff can be huge, and there are ways to start small to grab the attention of customers and gain buying power.
This report, prepared by the CMO Council in collaboration with Deloitte Consulting LLP, explores the importance of LTV, what makes measuring and tracking LTV so challenging, and how marketers can start getting better LTV scores. Our report is based on a survey of more than 150 global marketing leaders and in-depth interviews with executives from Informatica, PepsiCo, Electrolux and Redbubble.
WHY DO BRANDS NEED LTV
Think of LTV as a comprehensive health check on your marketing and business. Are you targeting the right customers? Are they getting the right experience that increases brand loyalty? Does the lifecycle of acquiring, retaining and enriching customers pay off?
When we asked marketers what was the most influential factor driving deep analysis of long-term customer value, by far the top answer (44%) was “a strategic organization’s focus on customer retention and value creation.” This is a pretty good reason.
On a more strategic level, LTV can help marketers justify spending on campaigns targeting specific groups of users. LTV can show that these groups will generate the most sales during their lifetime.
Ram Krishnan, PepsiCo’s global chief commercial officer, said: “Media and marketing campaigns are focused on attracting the most people, not the most suitable people to drive growth. We need to improve our approach to provide Personalized, valuable experiences. We need to work on building long-term relationships with consumers.”
The bigger wins go beyond marketing. Our survey found that most CEOs (53%) and sales leaders (49%) use LTV to drive strategic decisions, along with many line-of-business leaders (44%), business development leaders (38%), chief financial officers Chief Revenue Officer (35%), Chief Revenue Officer (35%) and Chief Experience Officer (18%). This finding alone suggests that the value of LTV extends well beyond the marketing department.
Ultimately, LTV is a key performance indicator of a company’s ability to deliver a great customer experience.
“I don’t think companies should look at LTV in terms of maximizing revenue for every possible consumer touchpoint,” said Brett Townsend, head of North American Insights at Electrolux. They get bored. It should be about making the customer experience so good that the next time they want to buy or engage with your brand, they’ll come back to you with joy, even excitement.”
In real terms, the ratio of CAC to LTV is a good starting point for understanding the economics of the entire customer. Marketers can also improve in this area. Revenue over the life of a customer should be three times the cost of acquiring that customer. However, our survey found that more than two-thirds of marketers believe their actual ratios are average or lower.
Rebecca Zarate, CMO of art trading platform Redbubble, said: “I rely more on LTV than traditional metrics to understand the performance of our investments. It gives us a clear view of how to get the right Consumers, and judging whether they are doing what we expect them to do, while traditional cost and return metrics make you not care about the customer journey or experience, but only what channels are monetizing.”
LTV is about a brand’s ability to develop loyal users, which leads to real economic value. The 2020 Deloitte Digital Report found that 87% of consumers have been loyal to their favorite brand for 3 years or more, and 61% have purchased from that brand at least 3 times in the past six months. Loyal customers also become brand advocates, influencing new sales through social media and product review sites.
So why should marketers struggle with LTV? Figuring out what to measure is not that simple.
“LTV is increasingly difficult to capture, track and understand as each business has to develop their own way of defining this metric. Given the differences between each business, there is no standard formula, ” Zarate said.
When marketers think of LTV, the first thing that comes to mind is the traditional definition—that is, a revenue forecast for a future relationship with a user. In our survey, 66% of marketing leaders cited “revenue per user” as a core measure of LTV. However, revenue per user alone does not provide the complete picture.
Companies that only focus on revenue and profit when measuring LTV also exclude their most valuable customers – brand advocates. They are the new, unpaid sales force that influences other people’s buying decisions through social media and online product review sites. There is no doubt that the calculation of LTV is very complex.
“It’s a math that every marketer has to deal with,” said PepsiCo’s Krishnan. “You don’t have a standardized way to measure because every industry and category is different, and every industry has its own unique economy. model.”
UNLOCKING LTV: SEGMENTATION AND TARGETING
Brands looking to increase LTV should seriously consider how to segment and target users. Don’t do it properly, a brand can end up wasting resources chasing the wrong customers. Our survey found that many marketers (84%) were moderate or poor at segmenting and targeting the customer segments with the greatest potential for long-term value.
Marketers often rely on traditional demographics that do not reveal buying behaviors that improve LTV scores. More valuable should be the customer’s psychological characteristics (i.e. personality, values, beliefs, lifestyle, attitudes and interests) and tracking online and offline buying behavior.
Of course, psychostatistics isn’t for everyone. A food and beverage company doesn’t track the psychographics of every customer, and every bag of chips they buy over their lifetime. However, even in these cases, better customer segmentation and targeting are still important.
PepsiCo’s segments and target customer base are made up of people with a shared focus on health. That means they look for functionally healthy beverages, such as immunity-boosting beverages. Customer groups can help PepsiCo identify opportunities to deliver value and grow LTV. “Our goal is to track the lifetime value of a consumer base,” Krishnan said. “We think a lot about the penetration and purchase frequency of a product in a given period — those are the dynamics of lifetime value.”
REPEAT SALES AND NEW SALES
A little secret of LTV is that it suffers from distractions. Marketers and business executives are distracted, focusing on other priorities. Although LTV is a metric rooted in marketing, our survey found that only one-third of CMOs believe they have it.
“Marketers are getting addicted to online advertising on social networks and forget about retention and LTV,” Zarate said.
LTV takes months to build as marketers figure out how to best define, formulate, measure and track LTV for their specific business. It’s a considerable investment and commitment, and many are reluctant to take responsibility for it.
Many business leaders also have more pressing priorities. They typically only focus on quarterly results and new sales, while LTV is a long-term indicator of user retention. Companies that sell products with a shelf life of decades will have to wait to see if LTV can accurately predict repeat sales.
Electrolux’s Townsend said, “Building relationships is a marathon and it takes forward-looking leadership to focus on LTV. Many companies focus on the here and now, and you have to remember that the average ceo tenure is five years. That’s what why a lot of companies are not doing well enough with LTV.”
When we asked who was responsible for strategic growth and profitability in this area, the answers varied: Chief Marketing Officer (32%), Chief Revenue Officer (16%), Head of Sales (14%), CEO (9%) and business line leaders (8%).
However, the correct answer is to need all of the above. Everyone needs to be involved, not just the marketing department. Sales, delivery, customer service and other departments must all contribute to the LTV equation.
Zarate said: “If you hold everyone accountable, you can drive LTV more strongly. Everyone needs to understand their role in creating a truly great customer experience. Don’t try to own it all yourself.”
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