Having a well-mapped customer journey and customer lifetime value can benefit your marketing strategy in many ways.
Do you ever wonder why some customers seem more valuable than others? What makes recurrent customers loyal? How can you make new customers and prospects stick with your company for a long time? These are some of the questions that often cross the minds of marketing executives.
If you run a digital business, you probably spend a significant amount of time thinking of plans to engage different profiles of customers.
In the media industry, where there are dozens of publishers and companies that sell similar content products, personalizing the go-to-market strategy is especially important. After all, what makes a customer choose to subscribe to a given media service, and not another?
There is no “one size fits all” strategy to retain audiences, and while leaders know that very well, it’s not always easy to navigate between different groups of customers. In this day and age, profitability goes way beyond closing one-time deals and requires companies to build long term relationships with consumers (which might be hard in such a competitive industry).
At the end of the day, it is far easier and cheaper to monetize existing, satisfied audiences than to focus solely on acquiring new readers and customers. In order to balance marketing investments and improve user experience with your media services, companies should pay attention to Customer Lifetime Value (CLV).
In this guide, we will talk about the concept, its importance in nurturing your customer lifecycle and how you can use technology to improve your CLV.
What is the customer lifecycle
The Customer Lifetime Value (also called CLV, CLTV, LCV, or LTV) is a financial metric used to look at customer profitability, mostly expressed in net profit . It represents the customer’s value to a company over a period of time and can help you predict how much value they can bring you in the future.
This metrics considers all the stages the customer goes through in the journey with your brand – from the moment they discover your company and considers your product until after they close the deal. CLV can connect marketing, sales, and customer success attributes, providing each team with valuable insights and cues for improvement.
The lifetime value is also crucial to help companies spot meaningful differences between customers. You can have clients who have been interacting with your company for the same amount of time, but, for some reason, some engage and spend more in your products than others. From a growth perspective, that means you could have different marketing approaches towards different groups, right?
Traditionally, business growth has been measured by the acquisition of new customers or by retention rates. Attracting a new customer, however, is six to seven times more expensive than keeping an existing one, according to research from consultancy ThinkJar. That is why marketers increasingly look to improve lifetime value, rather than just investing in cold acquisition and retention strategies.
The importance of Customer Lifetime Value
Customer lifetime value has become more important on the agenda of C-level executives and digital transformation leaders.
While most executives are aware of the concept, a UK study from Criteo, conducted with 100 marketers, found out that only 24% feel their company is monitoring CLV effectively – and such struggle probably remains true anywhere else in the world.
On the other hand, the study shows that among the companies who are doing a good job measuring CLV, 81% have improved their sales results and 57% are implementing more timely marketing actions.
Essentially, calculating and monitoring customers CLV effectively can give you a broad perspective of how customers relate to your brand across the funnel – from content and social media to after you close the deal. Your team can then redirect investments more accurately.
CLV can be used through different business functions, including marketing and customer experience (CX) management. On top of that, it ultimately allows you to improve a bunch of metrics related to customer acquisition and customer retention, churn, and ad performance. Sounds fantastic, right?
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Stages of the customer lifecycle
What if you could use a single metric to design a better overall customer experience? Knowing your customer lifetime value enables you to craft a more accurate market plan to attract customers, a better upselling strategy for current customers, and so on.
The customer lifecycle can be broken down into a few main steps: awareness > attraction > engagement > consideration > purchase > delight and advocacy. Each stage brings opportunities to strengthen the relationship with your customers – beyond just making the sale.
We will later dive into the outcomes of a lifecycle-oriented strategy and its effects on CLV, but, for now, let’s dive into each stage in the cycle:
Awareness: This is where your relationship with the customer begins – when the customer discovers your brand, service, or product. It can happen when the customer searches for a topic related to your company when he is impacted by your ads for the first time or, in the best scenario, when they hear about your company via recommendations from friends and influencers.
Attract: After customers hear about you for the first time, if your segmentation is correct and your content is appealing enough, they are likely to start scanning your website, social media, and other channels.
Engagement: At this point, customers are well aware of your company after interacting with ads and proprietary content. They now might interact with your brand in social media, signup for emails and newsletters, for instance.
Consideration: This stage is very important and can take days or months until a customer gets here. It’s when prospects relate to your brand and know your company can potentially offer them some value, but they still do a lot of research and comparison between you and your competitors in other to decide who they are going to buy from. In this stage, users also evaluate their experience with your interfaces – whether they are webpages, free trials, etc.
Purchase: After you have proven that your content and user experience are amazing (and better than those from your competitors), that is when the customer will finally decide to purchase your product. In the media industry, it could be a digital subscription or a specific on-demand service.
Customers will also judge the quality of your customer support while closing the deal. If it’s a self-service system, is it self-explanatory? Do you have 24/7 customer support to assist customers in real-time? Studies show that customers want to be able to talk to a live person during and after a purchase. Consider using intelligent applications and live chat to assist customers in this stage.
Delight and advocacy: This stage might look simple, after all, you have already finished the sale. However, it is probably the trickiest stage in the customer journey. Your company has to continuously show the customer value through excellent content, service, and support, just so the customer maintains the connection with your brand.
If you’re successful, loyal customers will start encouraging other prospects to join you, recommending your brand to friends and colleagues, engage in social media, and write positive reviews. More than that, they will be more prone to upgrade to newer products and add new products and services to their package.
The infographic below, from digital hub i-Scoop, illustrates the stages of customer lifecycle and how it operates in a feedback loop.
How is Customer Lifetime Value (CLV) related to Customer Lifecycle Marketing?
So far, we have explored several steps involved in building long-term customer relationships. As a business, it is your job to structure a good customer lifecycle marketing plan, guiding customers towards your direction in the conversion funnel instead of simply hoping they will choose your brand.
It’s a hard task, but in today’s competitive market, you have to continuously provide customers with value across multiple touchpoints, just so they can do the opposite and generate more value to your company over time.
In the media industry, that means customers will choose to renew subscriptions over and over, or that they will join a premium service or loyalty program.
However, not all customers will naturally do that (regardless of your great content and CX), and so CLV gives you a realistic picture of customers who will be more profitable, while also informing your team about how much they should spend on customer acquisition and retention.
We have made a list of 7 specific ways CLV can boost your customer lifecycle marketing.
1) Acquiring higher value customers
After doing CLV analysis on all your current customers, you will have a better idea of how they found out about your brand, how long they took to close the deal, which were their favorites communication and content channels and which clients have spent more in your services. From there, you can focus on acquiring similar profiles of customers.
2) Creating customer clusters based on value
CLV allows you to spot which customers are “VIPs”, which provide lower value but show growth potential and the ones that provide little value and are likely to churn, for instance. You can then redirect ad and promotion dollars by optimizing strategies for each cluster.
You could, for instance, offer a special offer or exclusive content to VIP customers, to make sure that you retain them, or invest in advertising to attract customers with similar backgrounds. You could also focus on upselling less valuable customers to increase their CLV and increase revenue.
3) Improve personalization and customer experience
Every customer expects a personalized experience, no matter if they are buying from you or not. By having different marketing strategies for prospects, loyal customers and lower value customers, you can make your messages more compelling and effective for each group.
When customers recognize you understand their stage in the customer journey, instead of bombarding them with general messages, they are more likely to stick with you for more time. Finding your CLV will make your company think not just about the sale, but about the full customer journey. Segmenting new product features, releases, or exclusive offers are also a great way to progress consumers through the lifecycle.
Besides, CLV enables you to find out if you’re communicating through the right channels. Is this particular customer responding better to email or display notifications? Through CLV, you can make sure each customer receives messages through their preferred channels.
4) Plan your advertising budget
Knowing your customers CLV also helps you to prioritize marketing channels and experiences. Are you going to invest in awareness display ads? Retargeting campaigns? Personalized content recommendations?
Analyzing the customer lifetime value informs you how much you can spend to acquire enough customers or do the upselling of clients – and if the investment is compatible with the revenue they can bring you. Investigating customer lifetime value can ultimately help you plan advertising budget and determine ad dollars more accurately, reducing Customer Acquisition Costs (CAC), and improving marketing ROI.
5) Measuring ad performance precisely
Customer lifetime value is also key to determine accurate attribution models and map the effectiveness of advertising across different purchases and customers. For instance, many marketers still rely on the profit from a customer’s first purchase to determine how valuable he is for the company, instead of relying on CLV.
A hypothetical example: let’s say a media company has two customers. One of them is Peter, who spent US$ 50 in his first content subscription, and Alexa, who spent US$80 in an intermediary option. It is natural to assume that Alexa is more valuable as a customer, right? But after measuring CLV, you might find out that Peter made multiple upgrades overtime, reaching to a US$150 in value, while Alexa never even renewed her first subscription.
In that case, the company will know that the ads invested in acquiring Peter can actually create more value than the ones used to acquire Alexa. By using customer data to map CLV, you get a precise picture about the effectiveness of your investments.
6) Predicting future revenue
While CLV is often thought of as a historic indicator of customer value, it can also be combined with predictive analytics models to give marketers an idea of which customers will likely upgrade, which prospects will become VIPs and which ones will churn.
However, predictive models can only work if your company has structured and accurate databases (We’ll later talk about how customer data platforms can help your customer lifecycle strategy).
7) Decreasing churn rate
Because customer lifetime value is all about customer loyalty, improving this metric will consequently decrease churn rates. It compels marketing teams to look at many factors in the customer journey and improve the customer experience overall, sending the right offers and messages to the right person at the right time.
It also compels companies to reengage with customers who haven’t purchased in a while and are in danger of churning.
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How to calculate customer lifetime value?
According to the Criteo study we referred to in the beginning, 93% of organizations have tried to measure CLV, but among them, an overwhelming majority of 69% believe that their companies could be doing better in calculating it.
There are different methods of calculating CLV. After all, interaction and buying patterns are often complex and take into account multiple indicators. The way you calculate CLV will also depend on the data your team has access to, the marketing and sales metrics it uses, and the level of “customer-centricity” of your company.
The simplest formula to calculate Customer Lifetime Value considers the revenue brought by a single customer throughout the total amount of time since the company closed the deal. Here it is:
Average annual customer profit X average duration of customer retention
Other calculating models have a more personalized approach and take into account other metrics. The most important ones are:
- AOV = Average Order Value
- F = Frequency
- GM = Gross Margin
- Churn Rate
Considering those metrics, the formula for calculating CLV is:
After calculating CLV, It’s important to check each of the metrics above individually and verify which ones are bringing CLV up or down.
Other methods even take into account metrics such as mailing costs, marketing costs per customer per year, average discount rate, and acquisition response rate. That is the model adopted by the Harvard Business School, which built an online calculator for CLV.
If you want to check a real-life example of LTV calculation, marketing entrepreneur Neil Patel build an infographic that shows LTV calculation for Starbucks customers.
Basic requirements to measure customer lifetime value
To properly manage customer lifetime value, your company should be aligned with four basic principles:
- All the stages of the customer journey should be mapped in detail
- Customer data should be widely available in one accessible system
- The company should have solid predictive analytics capabilities and teams capable to deal with high volumes of data
The role of customer data platforms in CLV
One of the challenges companies face in monitoring CLV is that much of their data is often stored in silos. Historically, businesses relied on CRM systems to monitor and calculate CLV. Nowadays, though, there are many more systems and touchpoints that can be monitored to add value to this indicator.
However, marketers don’t always have access to the data they need to drive effective change. According to the Criteo Study, 31% of marketers point out poor integration between systems as a factor that hampers their ability to increase CLV. Another 45% of respondents call out cross-device tracking as a barrier, while a further 37% simply aren’t able to measure it.
When relating CLV management to high-touch technology, customer data platforms CDPs can:
- Create unified customer profiles: The basic advantage of CDPs is the ability to access unified customer profiles across anonymous and known data sources. Without this profiles, it’s hard to address the customer lifecycle accurately.
- Integrate multiple Softwares: CDPs make it easier to spot gaps throughout the customer lifecycle because it connects online and offline channels, payment systems, DMPs, CRMs, and many other client-facing platforms.
- Calculate LTV: CDPs unify key components of the formulas in a single platform, and some even offer CLV as a metric.
- Automate segmentation: With a good CDP, your company is able to segment customers by their lifetime value, sending automatically personalized campaigns to different clusters. Besides, you could add content and product recommendations to your channels according to the needs and navigation habits of each individual customer.
- Offer data in real time: Unlike other data management systems, CDPs allows you to access updated data in real time, therefore offering more trustworthy information for your decision-making process.
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How to maximize customer lifetime value across the customer lifecycle
So you have tracked key metrics, calculated your customer’s lifetime value and incorporated technology to assist you in your lifecycle marketing strategy. What now?
It’s time to get hands on and work on customer value maximization. You might choose to focus on improving purchase frequency or profit margin, for instance. It all depends on your business and objectives.
But remember: CLV maximization has to walk side by side with customer experience, so always consider customer journey in an integrated way – from the first contact to customer relationship management -, rather than narrowly focusing on a specific metric or channel.
Some tips to constantly improving your customer lifecycle include:
Monitor your industry: compare your KPIs to the averages from your industry to determine which ones you need to focus on. Prioritize weaker KPIs to maximize lifetime value.
Share useful content: Put some effort in sharing useful, engaging, search-engine-optimized content, just so your company will be shown more frequently when customers search online.
Remove friction from the purchasing stage: Make sure your ordering and payment systems are intuitive, simple, and only require necessary data. The fewer steps your customer has to take to complete a purchase, the better.
Encourage brand advocacy: Encourage loyal customers to share their experiences via online surveys, review websites, or discounts for referring friends.
Now that you realize the importance of Customer Lifetime Value and Lifecycle Marketing, you can get better at using it effectively, while also saving money and time.
If you’d like to know more about how Arena’s CDP can help your company beyond CLV, please check out our blog section about customer data platforms, where you will find valuable insights about CDPs applications and use cases. You can also click here to get in touch with one of Arena’s consultants.