The Main Metric—Customer Lifetime Value

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By: Mike Stocker

I’ve been at Marketo now three years, where I have managed the customer success team and, as a part of that role, personally managed several of our largest enterprise customers. In managing those customers I gained insights into what many CMOs were hoping to achieve in their Marketing efforts. Now, in my current role, as Director of Business Development, I’m helping to drive partnerships that provide additional solutions that help Marketo marketers be more successful in their marketing. In both roles, and through many conversations, it’s clear that many CMOs are struggling to get a clear picture of how their paid media acquisition channels perform when viewed through the entire customer lifecycle.

My belief is that by connecting the worlds of paid media and acquisition and marketing technology and engagement, CMOs can get a complete view of the customer lifecycle. At that point, they can decide where to allocate their budgets to get the maximum return.

But CMOs continue to face organizational obstacles that prevent that from happening. All too often, the groups inside companies responsible for customer acquisition and the groups who manage retention and engagement live in different silos, if not different worlds. And that’s not making the CMO’s life any easier.

Lifetime customer value

In the last decade, marketers have embraced engagement marketing as a way to cultivate high-value relationships with loyal and long-term customers. But many companies are still only focused on the cost of acquiring customers on a one-off basis. It’s almost a throwback to the era of transactional marketing when the goal was to generate revenue short-term, not forge long-term relationships between the business and its customers.

Understanding customer lifetime value can be a difficult proposition. Remember that a lot of marketers are, well, marketers and not technologically inclined. Getting at this data often presents a technological hurdle, and marketers may not be adept at stitching together the new technology and big data systems needed to get a true picture of lifetime customer value.

This has been a challenge for marketers long before the arrival of the Internet. But it’s a vital metric for CMOs who otherwise are forced to fly blind about what they spend and the true returns on their acquisition efforts.

I was listening to a presentation by an e-commerce CMO whose division did about $100 million in revenue. When we spoke afterwards, I asked whether she knew who her best customers were.

“What was the lifetime value of each of the company’s customers?” I asked.

No idea.

“It’s too hard to pull that data together,” she said.

I scratched my head after hearing that. When you think about digital marketing and e-commerce, all that information is trackable. It’s just a matter of bringing systems together.

Six months later, the parent company shuttered the division. It simply didn’t know who their best customers were and was marketing without understanding the ROI contributed by each of the company’s channels.

Reach out and touch someone

CMOs can’t get an accurate picture if these two camps—the folks responsible for acquisition on one side and the folks charged with retention and engagement on the other—don’t talk with each other. It’s only by breaking up the organizational silos and bridging those two worlds that you’ll have a clear idea of the customer journey as well as the broader customer life cycle.

This is more than a call for “kumbaya.” By letting super-valuable customers slip away, the organization loses a tremendous opportunity to make money later on.

I can demonstrate this with the example of an automotive marketing campaign where the company is only concerned with immediate returns.

Assume that some customers who came in to buy a vehicle also planned to buy several more cars from the same manufacturer over their lifetimes. Even if we were only talking about a few customers, all are worth their weight in gold. But a transactional approach that valued only the single point of sale would shut down the campaign if it failed to meet expectations for immediate returns, especially if you didn’t know what the true lifetime value was over time. There is no room in that calculus for some of the best customers the company could hope to find.

Take a page from Williams-Sonoma

Pat Connolly, the great CMO at Williams-Sonoma, likes to joke that he’s held the title CMO longer than anyone ever. But tenure brings wisdom and after some 30 years in the post, he’s stored up valuable insights about what works and what doesn’t. And Pat’s a proponent of utilizing technologies that help his team understand the product preferences and lifetime customer value of the people who shop from Williams-Sonoma.

The reason he’s so good at this is that he and Williams-Sonoma have a rich heritage of catalog based direct marketing background. Catalog and direct marketers were the first to recognize the benefits of measuring their costs of acquisition and understanding the metrics around lifetime customer value. Since Williams-Sonoma ships huge numbers of catalogs that cost a lot to print, the company needs to calculate what they expect to make from each of their customers over a period of time—or they risk wasting a lot of money. At the same time, if you make purchases from Williams-Sonoma, they keep your preferences and later will offer things that are complementary as they upsell and cross-sell effectively to their customers.

Starbucks gets it right

This is no secret to anyone who works with me, but I’m addicted to Starbucks. And the reason has to do as much with the company’s understanding of lifetime customer value as with the quality of its particular brew.

The company rewards me with a free drink or food item each time that I accumulate 12 stars on their app. This loyalty program nicely demonstrates the concept of customer lifetime value in practice. Until I starting using their mobile app, I would rarely patronize Starbucks; now I go there every morning. In return, I receive the company’s gold card with numerous special offers, because Starbucks values me as an important customer who is going to spend a lot of money in their stores. Or at least they’ve succeeded in making me feel valued.

Fast takeaways

Those are just a couple of examples of the companies who get the importance of Customer Lifetime Value. Many companies are starting to think more about their customer lifetime value and customer lifecycle and the common theme of those that are doing it well is that they are leaders in their fields. It’s hardly coincidental that the companies that misunderstand lifetime customer value often turn out to be the laggards in their sectors.

There are clear lessons here for marketers:

• If you only focus on acquisition and don't include the entire customer lifecycle, you’re simply shooting yourself in the foot.
• Lifetime customer value needs to be the main metric you are measuring on and not just immediate acquisition.
• Tear down those silos—All your teams should be collaborating productively so when the CMO says, `Show me the money,’ they know the true returns their paid media campaigns are driving and budget can be allocated for maximum results.