Customer Lifetime Value: A Key Metric Only 17% of Brands UnderstandMar 1, 2017 - by Jason Grunberg
If you want to understand customer retention, you need to understand customer lifetime value. Unfortunately, customer lifetime value can be tricky to define and measure. How long is a customer lifetime, anyways? As a result, many marketers stumble over it, and turn to metrics such as customer satisfaction and net promoter scores instead.
Only 17% of marketers say that within their organizations, everyone that needs to understand customer lifetime value does so. Eighteen percent say their organization does not even calculate customer lifetime value.
These figures come from a recent study by Sailthru and Forbes Insights, which surveyed 300 retail and media executives to discover how they approach — and leverage — customer retention. We found that 14% of companies are increasing investments in retention over acquisition and seeing success in doing so. They’re what we call the retention gurus. Another 14% did just the opposite. They’re acquisition athletes, favoring acquisition over retention.
From Metrics to Management
Neither group of organizations was exactly stellar in its use of customer lifetime value as a metric. However, the retention gurus are unsurprisingly doing quite a bit better. Yet even still, the most shocking insight regarding customer lifetime value is that while many organizations understand its causes and effects, few say that their management teams understand the impact of the metric on revenue and growth.
Among retention gurus, just 19% said that in their company, management understands its impact on revenue and growth. Only 9% of acquisition masters were able to say the same.
They say you can’t manage what you cannot measure. In this case, clearly what is being measured isn’t being managed. This is why, we believe, organizations struggle to prioritize retention focused investments at the same rate that acquisition investments are growing.
When the Long Game is the Only Game
The disconnect comes from the priority that organizations place on short-term growth over long-term gains: a dangerous game. Decisions that drive conversion optimization today often forsake tomorrow’s profits.
Take sweepstakes for example. This traditional tactic allows retailers and publishers to drive email list size and new customer acquisition on the cheap. Offer a prize that nobody can refuse, or so many chances to win that consumers think they have a shot at the prize. Voilà, you have an email address. Eventually, thousands of new customers will have entered the top of funnel for a lower cost per acquisition than a Facebook ad. It’s a great report to take back to your boss.
But take a look at the results from those programs downstream and the picture becomes bleak. Consumers coming in from contests are more than 50% more likely to opt-out of communications in the first month than those coming from other paid channels. Even more sobering, they’re more than 60% less likely to ever make a purchase.
Given these factors, that cost per acquisition rate soars when considered over time. The goal of acquisition is conversion. If that is never reached, the customer unit economics simply do not pan out.
This is where the customer lifetime value-to-management disconnect becomes critical to solve. Marketers must shift their thinking and measurement strategies from campaign-to-campaign to cohort-to-cohort. By dissecting marketing’s impact on the cohort level, trends over time can be used to make the case to management for prioritizing long-term initiatives.
And then, customer lifetime value may finally see the light of day in the next leadership team meeting.