During the 1990s, marketers hailed return on investment (ROI) as the holy grail of KPIs. While the principle wasn’t new, it was an ideal metric for determining how effectively marketing teams spent their budget. Today, as data-driven businesses and work culture become the new standard, professionals measure themselves by another key performance indicator: customer lifetime value, or CLV.
More from PostFunnel on KPIs:
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What is CLV?
Customer lifetime value, or lifetime value (LTV), summarizes customers’ past business with a company and calculates the projected net profit of an ongoing relationship. In its most complex form, CLV is a detailed and often proprietary statistical model which imparts customer history and purchase/engagement predictions.
Today’s marketers are increasingly emphasizing CLV because it provides a longer-term measurement than immediate ROI. In a recent survey, 92% of marketers in the UK said that they were actively monitoring CLV as a metric. The report also found a significant increase in the number of marketers aware of (9%) and actively monitoring (8%) CLV in the last year. Those same marketers generally agreed that CLV lets them increase customer retention and sales volume while encouraging greater brand loyalty. Monica Eaton-Cardonne, COO at Chargebacks911, said marketers who aren’t monitoring CLV are “essentially flying blind, with no gauge to determine the right amount to spend to bring in and retain customers.”
What’s wrong with ROI?
Many have criticized ROI as a static model. It fails to take into account the time factor, and only calculates profit at the moment of sale. Using ROI means a marketer is focused on single transactions, or the aggregate of many transactions, but not on the future impact of those transactions or who’s making them. Marketers use ROI to get an idea of whether a transaction or campaign was efficient, but its contribution—or lack thereof—to long term growth cannot be measured with ROI alone.
For example, ROI for a widespread campaign may be $2 for every $1 spent in a year. However, if a marketer knows that a group of customers has a much higher CLV than another group, a more precisely targeted $1 could return $3 over two years instead. ROI only shows what a specific investment returned, whereas CLV informs marketers on who those customers are, how to gain new ones, and what the value of retaining the old ones might look like. Simply put: it’s a case where knowledge is power.
CLV also throws old ROI metrics into new light, giving marketers new dimensions to demonstrate ROIs that were once considered difficult or impossible to explore. CLV is also driving improvements across a variety of marketing fields:
- Customer acquisition versus customer retention
- The precise financial benefits of loyalty programs in driving non-loyalty sales
- How to implement cross-selling programs based on customer habits
- Where support costs can be safely cut without decreasing overall customer retention
The Retention Revolution
Marketers are not surprised by the idea that a customer-centric approach like CLV is beginning to take precedence over a business-centric approach like ROI. That said, experts still agree that most companies are not truly customer-centric. “Customer centricity,” says industry analyst Brian Solis, “is a culture of putting the customer at the center of everything you do.” Metrics like ROI that focus on business rather than customer activity may reinforce a professional marketing culture that isn’t truly customer-centric.
Part of CLV’s sudden rise to popularity is about a revolution in retention marketing. “In my experience, the average cost of acquiring a new customer is much higher than the cost of keeping an existing one,” says Eaton-Cardonne. Indeed, acquiring new customers can cost seven times as much as retaining old ones, while studies have shown that a 5% increase in retention rate can cause a 25% or greater increase in profit.
These are surprising numbers. Some commentators now call for a “hard reset” in how marketers allocate their budgets—saying 50% or more should go toward retention marketing. This is all part of the focus on long-term results a CLV analysis provides.
The Future of CLV
Using CLV as a performance indicator tells marketers how much profit is generated by retaining customers, as opposed to focusing exclusively on customer acquisition. In turn, it provides a better model for allocating marketing budgets between the two efforts. From there, advanced CLV models can incorporate retention rates, showing the profit potential post-retention. Those models are fed back into a company’s ROI models to give a hybrid approach—perhaps the best for the near future—that will lead to a better understanding of both metrics.
Search and social marketers sitting on the precipice of new digital marketing techniques have plenty of insight into this future. They’re already looking at metrics that incorporate CLV into a larger picture, getting a better idea of other statistics. For example, the Unified Lifetime Value Calculation, or ULC, is designed to compare ROI against CLV to balance spending on retention versus acquisition. These KPIs succeed in the same way that CLV surpasses ROI: They give marketers not just a vision of the past and present, but how to behave in the future.
All those benefits and all this attention, however, doesn’t mean that CLV is given the respect it’s due. Organizations are still slow or resistant to adopting CLV as a key performance indicator. 40% of organizations in the UK study lacked in-house CLV monitoring, and 27% found it too complex to monitor. Meanwhile, 18% were unable to act on their CLV findings and 20% said senior leadership was resistant to the metric.
Despite this, the year-over-year increase in marketer awareness of CLV and its documented benefits aren’t going anywhere. As older models like ROI are replaced with more effective, agile models like CLV, the professionals that survive will likely be those willing to adopt new tactics and insights early.