Additional Considerations when using Customer Lifetime Value

The deep dark secret of nearly all analysis or metrics is that 99% of people will tell you they are a good idea, about 10% of people are actually looking at them, and about 10% of those are actually using them to significantly change their decision-making. This doesn’t change the fact that they are a great idea, it just means you need to be really careful not to waste your time.

Customer Lifetime Value

Customer Lifetime Value is a concept taught in countless marketing classrooms and is simple to grasp – it’s fundamentally the total value that a customer will spend with a business over their full life as a customer. What makes Customer Lifetime Value powerful is the realization that customers have relationships with businesses – so when we acquire a new customer, we’re actually acquiring all the purchases they’ll make with us over time. And the same goes when we lose them.

That sounds great – what’s the problem?

If you accept that Customer Lifetime Value is inherently a good idea (and the right way to think about things), you run into two problems when you try to use it to make decisions:

  • It’s backward looking.  Because you’re trying to figure out not what a customer’s value is today, but to predict what it’ll be over the next several years, you usually end up trying to factor in multiple years of past performance, or you end up trying to predict it off of a cohort analysis or regression model.
  • It’s complicated. The reason we use metrics and analysis is to be able to evaluate decisions we are making – in basic form, you do X, you get Y.  For this to work well, you need to have a ton of faith in Y and you need to be able to see it quickly.  Because customer lifetime value is a prediction, we’re likely to spend more time trying to understand it, calculating it or debating it.  Think back to how often analysis doesn’t get translated into action.

An Alternative Approach

Now, while trying to predict Customer Lifetime Value will remain crucial for some decisions, there’s an alternative approach:

  1. Try ideas often
  2. Observe the impact on clear metrics
  3. Measure those customers over time to understand long-term impacts

Let’s take an example. Say you are debating whether to send lapsed customers a discount offer to entice them to come back. If you take a subset of those customers and try it out, you’ll quickly know the answer to questions you could only speculate about before:

  • How many customers come back? More than would have otherwise?
  • How much do they spend? On what?
  • Do they come back again over the coming months?

Customer Lifetime Value is an important reminder that we need to focus on the complete customer relationship over time – but as with all analytics, you need to make sure that your work gets translated into action.

Klaviyo lets you quickly implement and measure the impact of customer lifecycle marketing for your web app or ecommerce business.  Try it today.

 

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