customer lifetime value

Using Customer Lifetime Value to to Improve Marketing Investment Decisions

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The profits generated during the retention phase of a customer relationship are often referred to as customer lifetime value or customer retention equity. Intuitively, we know that Customer Lifetime Value (CLV) is an important metric for every company. It represents the value of your organization’s relationship with the customer. 
 
While CLV has tremendous financial implications, it also serves to facilitate marketing investment decisions. As with any investment portfolio, you want to invest more in assets that produce a higher yield. It makes sense to invest more of your marketing dollars in customers that are more profitable and prefer to buy from you, cost less to serve, and recommend your services thereby helping to reduce new customer acquisition costs. 
 
CLV helps you determine in which existing customers to invest and which types/profiles of customers produce the highest CLV. You can use these profiles to acquire new customers that best resemble your existing high value customers. Using CLV insights, you can identify both existing and prospective high value customers and shape your marketing to uniquely meet their message, offer, and channel.

How do you calculate CLV? There are various approaches but here is a simple way to calculate customer retention equity or CLV:

  • Determine the average retention rate of your customer base.
  • Compute the average expected duration of a relationship with a customer using this retention rate.
  • Determine the average per period margin and costs that are associated with retaining this customer.
  • Multiply the period net profits by the number of periods the relationship lasts.

Here’s an example:

  • Suppose for the past four years your retention rate for a set of customers has been 60%, 61%, 62%, and 61% over a 4 year period. This equates to an average retention rate of around 61% (i.e., 61 = (60+61+62+61) / 4).
  • Analysis reveals that the expected relationship duration for the average customers is 1/(1-average retention). (1/1.61). In this case that is 2.56 years.
  • After analyzing the historical data over the same 4 year period, the firm has determined that the average margin is $7500 and the average costs over this period $750. This equates to a net margin of $6750
  • Expected retention equity is $17,280 ($6750*2.56).

Calculating customer retention equity demonstrates why it makes sense to invest in keeping customers. It’s a very interesting way to get a handle on your customer portfolio and to segment your customers. By improving revenue per customer and customer retention, while lowering cost to acquire and serve, you can positively impact CLV.

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Measuring Relevancy: A Three Step Approach for Linking Content and Behavior

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Various studies over the years have examined the relationship between content relevancy and behavior. Almost everyone would agree that content must be relevant. But what is relevance? According to Wikipedia: “Relevance describes how pertinent, connected, or applicable something is to a given matter.” A thing is relevant if it serves as a means to a given purpose.Image

In the context of this discussion, the purpose of content is to positively influence customer or employee behavior, such as increasing purchase frequency, purchase velocity (time to purchase), likelihood to recommend, productivity, etc.

When we ask marketers and others how they measure content relevancy, we often hear, “We base it on response rate.” If the response rate meets the target, then we assume the content is relevant; if response doesn’t meet the target, we assume it’s not relevant.

Clearly there is a relationship between relevance and response. Intuitively we believe that the more relevant the content, the higher the response will be. But measuring response rate is not the best measure of relevancy. Many factors can affect response rate, such as time of year, personalization, and incentives. Also, in today’s multi-channel environment, we want to account for responses or interactions beyond what we might typically measure, such as click-throughs or downloads.

So, what is the best way to measure relevancy?

The best-practice approaches for measuring relevancy are many, and many of them are complex and require modeling. For example, information diagrams are an excellent tool. But marketers, who are usually spread thin, need a simpler approach.

The following three steps provide a way to tie interaction (behavior) with content. It’s critical
that you have a good inventory of all your content and a way to define and count interactions, because once you do, you’ll be able to create a measure of relevancy.

The process and equation include the following:

1. Count every single piece of content you created this week (new Web content, emails,
articles, tweets, etc.). We’ll call this C.

2. Count the collective number of interactions (opens, click-throughs, downloads, likes,
mentions, etc.) for all of your content this week from the intended target (you’ll need to
have clear definitions for interactions and a way to only include intended targets in your
count). We’ll call this I.

3. Divide total interactions by total content created to determine Relevancy: R = I/C
To illustrate the concept, let’s say you are interested in increasing conversations with a particular set of buyers. As a result, this week you undertook the following content activities:

• Posted a new whitepaper on a key issue in your industry to your website and your
Facebook page
• Tweeted three times about the new whitepapers
• Distributed an email with a link to the new whitepaper to the appropriate audience
• Published a summary of the whitepaper to three LinkedIn Groups
• Held a webinar on the same key issue in your industry
• Posted a recording of the webinar on your website, SlideShare, and Facebook page
• Held a tweet chat during the webinar
• Tweeted the webinar recording three times
• Posted a blog on the topic to your blog

We’ll count those as 17 content activities.

For that very same content, during the same week, you had the following interactions:

• 15 downloads of the whitepaper from your site
• 15 retweets of the whitepaper
• 15 Likes from your LinkedIn Groups and blog page
• 25 people who attended the webinar and participated in the tweet chat
• 15 retweets of the webinar
• 15 views of the recording on SlideShare

That’s a total of 100 interactions. It’s likely that some of these interactions are from the same people engaging multiple times, and you may eventually want to account for that likelihood in your equation. But, for starters, we can now create a content relevancy measure:

R= 100/17 = 5.88.

Using the same information, had we measured only the response rate, we might have counted only the downloads and attendees—40 responses—so we might have had the following calculation:

R = 40/17 = 2.353

As you can see, the difference is significant.

By collecting the interaction data over time, we will be able to understand the relationship between the relevancy and the intended behavior, which in this example is increased “conversations.”

I strongly encourage you to consider relevancy as a key measure for your content marketing. By tracking relevancy, you will be able to not only set benchmarks and performance targets for your content but also model content relevancy for intended behavior.

Cracking the Code on Marketing and Sales Alignment

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The dynamics of the 21st Century are forcing businesses of all sizes and types to be able to react quickly and decisively to rapidly changing business and competitive conditions and Imagechanging customer demands. The more agile a company, the faster it can respond to market dynamics and develop new products and processes, recognize new opportunities, and redeploy resources accordingly. The degree of agility may be the difference between being a market leader instead of an also-ran. Agility requires proactive planning, business intelligence, alignment and collaboration among all the key functions to make the right decisions and turn opportunities into a competitive advantage. One of the key alignment issues facing many companies is the alignment between Marketing and Sales.

Marketing and Sales Alignment Remains Elusive

The issue of marketing and sales alignment isn’t new. Most marketing and sales people have been in organizations where marketing has been known to accuse sales of not following up on leads and refusing to track leads through the sales cycle and sales has been known to accuse marketing of not providing viable qualified leads. This misalignment is often attributed to a variety of factors, such as different goals, different timelines, and different psychologies. Market dynamics such as commoditization, the Internet, mobility and virtualization and changing business models only compound the problem. Companies attempting to resolve the issue often approach the problem by trying to tighten the alignment of marketing activities within the sales cycle, improving coordination around lead generation, and increasing sales force participation in the marketing process. Sadly these attempts often fail. Regardless of various approaches taken by companies to address this issue, the lack of alignment and collaboration between marketing and sales persists. Both organizations need to change for the organization to succeed.

 From Transactional to Customer Centricity

To achieve greater alignment, both organizations need to decide together which market segments offer the best opportunities and deserve the highest priority. Today’s buyers are more sophisticated and today’s buying processes are more complex. The transactional approach of marketing generating qualified leads that sales then brings to a close is an outdated view. The transactional approach is what permits marketing and sales to operate as independent silos. This results in Sales immersing itself in the latest training, engaging in calling on customers and focusing on post-sale efforts and Marketing focusing on implementing various campaigns and 2 coordinating a variety of tactics.

A Customer-Centric Approach Offers Hope

Customer Centricity requires a company to look at the world through the eyes of the customer, what they want from you, what they expect from you, what they can count on from you. One way to become more customer-centric is to move from looking at the world from a selling perspective to taking a customer relationship lifecycle perspective. Taking a customer relationship lifecycle approach provides an avenue for alignment by focusing both organizations on the same set of outcomes – creating, keeping and growing the value of customers. The customer relationship lifecycle begins the moment a customer appears on the radar screen, moves into the lead-sales funnel, emerges as a customer and engages in a variety of experiences that result in them becoming an advocate. The customer relationship lifecycle provides insight into which customers provide the greatest values to your company. As result, the company can create a set of common metrics for both organizations which will help ensure alignment. Customer relationship management metrics include buying related metrics such as recency frequency and quantity; cost related metrics such as gross amount of money spent on acquiring and retaining the customer through marketing dollars, resources spent generating each sale, and post sales service and support; and customer value related metrics such as the duration or longevity of that customer’s relationship with your business, the referral rate, and share of wallet. Establishing a common set of customer-centric metrics facilitates alignment and collaboration and provides both organization with customer-oriented vocabulary and set of priorities.

Does Alignment Matter?
While no one can offer any guarantees, aligning Marketing and Sales makes good business sense and ultimately impacts the bottom line. A study conducted by Aberdeen on sales effectiveness with more than 200 executives from the executive, sales, marketing and IT management functions study found that companies that had strong collaboration between these two functions achieve a higher sales effectiveness. For many companies, this additional boom in sales more than justifies making the effort.

How Vulnerable Are You to Customer Defection?

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In this article, you’ll learn…

  • Five factors for maintaining successful customer relationships
  • How to identify your most vulnerable customersImage
  • How to calculate your company’s vulnerability index

In the early ’90s, the term “customer relationship management” (CRM) joined the marketing lexicon. Though the idea is often thought to refer to the implementation of some kind of technology, the real idea behind CRM is that the management of customer relationships is a business imperative.

CRM is about deciding which customers or segments to target, and then developing customer acquisition, retention, and growth plans that will attract and keep your best customers. CRM is really about making your customers the heart of your business.Our job as marketers is to acquire, grow, and retain profitable customer relationships to create a sustainable competitive advantage.

How do you measure customer relationships?

We’ve all come to accept that creating customer loyalty is an integral part of any organization’s strategy and focus. Various factors influence the success of any customer relationship initiative.

Here are five critical success factors:

1. Clearly defined business outcomes related to customer acquisition, retention, and growth

2. Agreement about who the customer is and what they want and need from your category (and you)

3. Well-defined customer segments (and their desired behaviors) and customer-experience objectives

4. A documented, integrated customer strategy

5. Explicit measures of success, and the data and processes needed to support the metrics

Customer satisfaction and loyalty are two of the most common measures of success. A variety of models are used to measure and quantify customer loyalty, ranging from simple recency and 2 referral models to RFM and customer lifetime value models. Recent research is examining those models to ascertain which, if any, truly measure customer loyalty.

Many organizations would agree that a loyal customer…

  • Stays with the brand despite competitive offers, changes in price, negative word-of-mouth, and product failures
  • Increases business/engagement in some way
  • Actively promotes the brand to others

Though there are many approaches to measuring customer loyalty, one metric that many
organizations should consider is the Vulnerability Index.Add the vulnerability index to your marketing KPI’s. A vulnerability index serves as a way to measure loyalty in the face of competitive pull. Its purpose is to help you identify your most loyal customers—those who are going to stick with you through thick and thin.

To calculate your vulnerability index, you will need excellent market intelligence about your
competitors’ campaign’s channel, offers, and markets. Once you have this information, follow these seven steps to construct your vulnerability index:

1. Map the competitive activity. Include the competitor’s name, offer, duration of offer, and the offer’s focus area and market.

2. Generate a list of loyal customers in the market where the campaign ran.

3. Map their repurchase and engagement cycle based on frequency and last purchase date.

4. Isolate all the customers whose repurchase or renewal dates fall within the competitor’s campaign period. This is your observation set (OS) and the set of customers who will experience the greatest competitive pull and are, therefore, the most vulnerable.

5. Define your observation period, which is generally the campaign launch date and one purchase cycle after the last date of the competitor’s campaign.

6. Monitor the purchases by vulnerable customers. Track all the customers whose purchases drop during the observation period. These customers constitute your vulnerable set (VS).

7. Calculate the vulnerability index. Divide your VS by your OS and multiply that number by 100:

Vulnerability Index = (VS/OS) x 100.

The index will give you a good idea of the proportion of customers who are succumbing to
competitive pressure and some idea about the level of loyalty in those customers. If the index is high, you know that there is something to worry about. If the index is low, you can assume, with some degree of certainty, that your customers are exhibiting robust loyalty to the brand.

Because Marketing is charged with finding, keeping, and growing the value of customers,
customer retention falls within the domain of marketing. Therefore, marketing organizations
should have at least one objective aimed at retaining customers. In addition to monitoring customer loyalty and advocacy and customer churn, Marketing should also keep tabs on customer vulnerability. If your vulnerability index begins to climb and exceed that of your competitors, you can anticipate that your defection rate is going to increase. By monitoring your vulnerability index, you will know who your most loyal customers are, and you will be able to develop and implement strategies to withstand competitive pressure.