When trying to influence customer lifetime value, I like to remember the adage “those who do not learn from history are doomed to repeat it”.
Customer lifetime value (CLTV) is a slow-moving indicator of the underlying trends and actions being taken by marketing, customer service, and operations. Without a solid understanding of the underlying components of a customer lifetime value calculation there will be little your team can do to influence it.
At its core, CLTV is a function of revenue and cost over the predicted lifetime of a customer. In theory a CLTV calculation might sound simple, however, in practice it can become tricky quickly. The development of CLTV can run into a multitude of issues that can become roadblocks if not addressed correctly.
The Struggle to Develop
Overcoming data availability and quality is the initial hurdle for CLTV development that must be overcome at many organizations. Transactional data stored within a central data warehouse is leveraged to generate the revenue component of the CLTV calculation. The lack of strong cost data causes issues when articulating the value being generated at the customer level.
A CLTV calculation can be constructed via many mathematical approaches, but all CLTV functions are built on known behaviors from your existing & prior customers. As with most things in life a CLTV calculation has the habit of regressing towards the mean.
In the absence of a strong data warehouse, an aggregated approach to CLTV is a path forward. Organizations will typically understand their average cost to acquire, average initial sale, average incremental sale to existing customers, and average margin. Each respective organization will determine their path on developing and implementing a CLTV calculation to meet their respective needs.
Understanding Customer Lifetime Value
The justification of marketing spend is one of the most common use cases for CLTV. By comparing the predicted CLTV and cost to acquire customers, a marketing department can better articulate the return on their marketing dollars to their executive counter-parts. It is critical to ensure double-dipping on these future earnings is not rampant across the organization. Concurrent testing is taking place across departments gains in future earnings can be unknowingly comingled.
CLTV appears complicated but is composed of a relatively small number of key elements: initial purchase, future purchase behavior, costs, and renewal behavior (in applicable). Coincidentally, these are the areas of emphasis that many marketing & customer service departments try to address through their internal initiatives.
When faced with limited resources, your marketing teams must work with their analytics counterparts to understand the opportunity to impact the respective elements of CLTV. A stronger understanding of CLTV assist with the prioritization of different tests and initiatives within your organization.
How to Influence Lifetime Value
Influencing the predicted CLTV of freshly acquired customers can prove difficult due to the volume and momentum of your legacy customer base. Making a large impact on a CLTV calculation will require a large amount of volume or area with low volume.
The real-world application of CLTV can illustrate the impact an organization is having on the customer base over time. By comparing cohorts or segments of customers you can easily understand areas of opportunity for the business.
A systematic approach to producing leveraging CLTV at your organization is critical to ensure proper buy-in across the organization. When evaluating the success of a test within your marketing organization CLTV should be leveraged instead of just purely looking at revenue & transaction volume.
Developing and implementing CLTV at an organization is a journey and few organizations get it 100% right their first try. Remember to iterate upon your calculation and introduce new data when appropriate.
If you are a Gartner client, then you can expect more notes to be published about CLTV in the coming months.
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