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.
As 2013 winds down and we prepare to enter 2014, there are bound to be a few changes in the CMO line up. You say, that’s not news, CMO tenure is always a bit tenuous. But actually, that is less true today than ever. In SpencerStuart’s 8th Annual CMO Tenure Study, it was reported that CMO tenure is now nearly 4 years, compared to just 2 years back in 2006. While CMO tenure varies across industries, there are several attributes long- tenured CMOs share. First and foremost, these CMOs can demonstrate positive impact on the company and have impact beyond the “marketing agenda.” They also tend think more like business-people who are able to provide strategic direction and use data and analytics to make fact-based decisions.
In addition to being an exceptional, technically proficient marketer, there are three attributes we see among successful long-term CMOs.
1. Customer-centric. These tenured CMOs connect regularly with customers. They do more than conduct voice of customer research, review customer data, or meet with a customer advisory board. They are actively and regularly engaged in customer conversations. Do you describe your customers for example as engineers with X years of experience in Y industries, Y accreditations, who attends B events, reads Y publications, and uses Z social media? If this example seems familiar you may be missing the mark. These long-tenured CMOs have a deeper understanding of their customers’ needs, wants, emotional state and motivations, what it takes to engage them, and the kind of experience that needs to be delivered. These CMOs serve as the window into the customer for their companies. They are relentless in their pursuit to know and understand the customer.
2. Outcome-oriented. It is clear to the leadership team that these CMOs have marketing well aligned to the business with metrics and performance targets focused on producing business outcomes rather than marketing outputs. These CMOs understand that outputs such as visitors, fans, followers, etc. create more contacts, connections and engagements that are important. They also understand that their job is to translate these outputs into something relevant and meaningful to the leadership team, such as how marketing’s contribution is reducing the sales cycle/accelerating customer acquisition, reducing the cost of acquisition or retention, and improving product adoption and win rates. These CMOs have an excellent handle on what touch points and channels are most effective and efficient depending on the needle that needs to be moved.
3. Alliance-savvy. There’s been a great deal of coverage on how important it is for the CMO to have solid relationships with their Sales, IT, and Finance colleagues, and our research shows that Best-in-Class CMOs do more than that. These CMOs have forged formal explicit partnerships with these counterparts. They invest in these alliances because they believe that the partnership will enable the organization to be more customer-centric and more competitive. As a result, these companies are able to enter new markets and bring new products and services to market faster. What is different about the alliances formed by these CMOs? They work with their colleagues to plan, form, design, and manage a formal working agreement that focuses on developing the right working relationship, taking into the account that each function most likely operates differently. They create and execute an agreement that emphasizes how the organization’s committed resources will achieve a common set of objectives, how to leverage the differences to the company’s advantage, and how these differences are designed to facilitate collaborative rather than competitive behaviors among all the members of each team. Performance metrics are established to support the alliance with a focus on both the outcome of the alliance as well as the process.
Whether it be the stream of green lights you hit on the way to work or the person that holds the door for you as you juggle groceries, at the end of the day, we are most appreciative of the people and things that make our lives easier. Although technological innovation and automation have given us the ability to soothe many of our woes, we cannot forget that the human element is at the center of all things marketing. In light of this, we must ask ourselves, “Would I be satisfied as a customer or colleague in this process, and if not, how could I change it?” By exemplifying these traits of a successful CMO, the outlook of your operations will shift from being self-serving to philanthropic in nature.
If you’re like us, you probably have one of those piles on your desk that keeps being moved from one corner to another. You know that pile you need to get to but avoid because it will take some real effort to tackle. For many marketing professionals, marketing accountability, analytics and ROI are in this pile. Not too long ago at a marketing conference where Laura was speaking, the organizers had set up round tables with specific topics for discussion over breakfast. Laura was sitting at the measuring marketing ROI (return on investment) table (of course, where else would I be sitting?) which was strategically located right next to the buffet line. While she was sitting there waiting for people to join her, she kept hearing people say, “Oh measuring marketing,that’s just too hard.” There were hundreds of marketers attending this conference, and about 2 dozen tables of 10 were set to accommodate the early risers. Yet only four other brave souls joined her.
We must stop avoiding this topic and tackle the pile. As Sylvia Reynolds the CMO of Wells Fargo says, “Marketing must be a driver of tangible business results…we must start with the goal in mind and a clear way to measure that goal.” ROI is important for accountability–besides being able to justify spending and enable us to run the marketing organization more effectively and efficiently, knowing what is and isn’t working helps marketing achieve greater influence and serve in a more strategic role. Various surveys suggest that over a third and as much as 42% of marketing budgets are not adequate enough to achieve the outcomes and impact expected.
Perhaps your organization like many others is in the thick of budget planning. A key part of budget planning is to establish and validate the money you plan to spend. The more aligned marketing is with the outcomes of the organization and the more the plan includes performance targets and metrics, the more likely you will be allocated the budget you need to achieve the expected results.
So what does it take to tackle this Marketing Accountability pile? Here are six affordable steps any marketing organization can take to start whittling away at the marketing accountability and measurement pile.
1. Focus. Nothing of importance miraculously gets done on its own. To effectively tackle the marketing measurement pile will take all of Covey’s seven habits: from taking a proactive approach and beginning with the end in mind, that is the outcomes you are expected to impact, to keeping the effort a priority when other things present themselves as urgencies to making marketing measurement a win/win for you, your team, and the rest of the organization. More than likely, you are going to need a cross-functional team to tackle this pile – people from finance, sales, IT, operations, etc. working collaboratively together to define the metrics and hunt down and organize the data.
2. Plan an attack. You know that age old question, “How do you eat an elephant?” The answer being, “One bite at a time.” This is true for the marketing accountability and ROI question. If this is a new effort for you, you need to break it into manageable pieces. Quantify your objectives, decide how you will measure them, collect the data that you need to meet the objectives, establish a baseline, gain commitment to the measurement plan, and finally, measure.
3. Get data: “Data is the new creative,” declares Stephan Chase of Marriott Rewards. Establishing metrics, determining effectiveness, understanding efficiencies, all take data. Without data you cannot monitor and measure results. And don’t assume that you have the data that you need to measure your objectives. For example, if you want to measure how many new customers you interest in a new product, you may find that you need first to determine what a “new” customer is. This may require different views of your existing customer records or new strategies for evaluating.
4. Analyze: Once you have the data, the challenge is to generate insights that facilitate fact based decision making. One of the most valuable applications of data and analytics is in leveraging your metrics. The metrics are what enable continuous improvement as you strive to achieve and set new performance standards. Just looking at numbers doesn’t tell you as much as evaluating trends or creating statistical models that help you identify an optimized approach to your marketing efforts. Consider looking at your measurements for what isn’t immediately obvious such as what might have happened if that campaign had gone to the three bottom deciles of customers?
5. Use a systematized process: You may need to set up systems and processes that enable you to capture and track results on an ongoing basis. Many organizations put a substantial amount of energy into initiating these programs and then let them fizzle as other priorities surface. It takes both process and discipline to sustain a measurement effort. Systems help you automate a process so that the process can become a manageable part of your day-to-day operations. Today every marketing organization is moving at a breathless pace. Implementing test and control environment can keep you from having a fatal, head on collision
6. Train. Many marketers are unaccustomed to living in a metrics-based environment. You may need to invest in measurement, analytics, as well as data training and skills development. Start by taking a skills inventory. Find out who in the organization has data management, analytics and measurement skills. Decide what skills they need to perform at your expected levels. Develop training that fills the skill gaps. Doing this in-house allows you to tailor to your needs, but consider courses from universities, associations and external consultants to fill out your requirements.
Moving marketing performance metrics from the “too hard to” pile to the “we can do it” pile can reap rewards for the entire organization.
For more information on Marketing Alignment and Accountability, download our Free White Paper: Charting a Course for Marketing Effectiveness: Alignment & Accountability