A Metric We Should ChaseArticle
Marketers rejiggering their systems to sharpen their focus on customer retention need to chase a key metric – Customer Lifetime Value. Here’s why, and how they can do that better.
In “Keep the Old…or Get the New?”,1 we argued that retaining existing customers was not only more profitable than acquiring new ones, but more valuable, too. In fact, businesses that have successfully rejiggered their systems to sharpen the focus on customer retention are enjoying richer harvests.
The CLV Metric
Marketers in those enterprises are also finding themselves looking closely at customer lifetime value (CLV). Once they have retention under their belt, they find examining CLV is the logical next step. CLV is the metric that gives you a handle on your sales numbers when more of your customers have a long lifespan at your company. It’s the net cumulative profit you can expect from a customer across the customer’s entire lifetime with your company.
Arthur Hughes, VP at The Database Marketing Institute, and entrepreneur-cum-business coach Brad Sugars break CLV down into six components: 2
- Order size per customer, frequency of orders, and retention time (Raise these, and CLV rises)
- Cost of sales, customer acquisition/marketing costs, and discount rates (Lower these, and CLV rises)
Interestingly, however, CLV is still a metric we don’t chase enough. Why not? Because most marketers don’t view customers as partners in the business. They label customers as “value-extraction targets,” says Michael Schrage, 3 research fellow at MIT Sloan School’s Center for Digital Business.
Why Chase CLV?
Schrage argues that chasing CLV results in a win-win – it’s what delivers maximum value for the customer and your business. (His insightful article – and eBook, Who Do You Want Your Customer to Become? 4 which he refers to in the piece – is worth a serious read.) To help marketers improve CLV in a real and lasting way, he makes a strong case for investing in customers. Schrage recommends that we “incorporate an investment ethos that sees customers more as value-creating partners than as value-extraction targets.” (Italics added.)
That’s when, Schrage points out, customer value multiplies many-fold, because customers get on a whole new level with the marketer – they “give us good ideas, evangelize for us on social media, reduce our costs, collaborate with us, try our new products, introduce us to their customers [and] share their data with us.”
What more could a marketer hope for?
How to Invest in CLV
Here’s a simple, three-pronged approach – covering strategy, software, and team – to move the CLV slider closer to the perfect pitch:
Develop your strategy
Develop a strategy based on your company’s vision, mission, and values. SaaS veteran Lincoln Murphy, on OpenView, 5 says marketers should define engagement and monitor it, because that’s key: engagement is inversely proportional to churn. High engagement means you have churn on a short leash. Engagement, however, cautions Murphy, isn’t a one-size-fits-all. Rather, it’s “knowing your customers, knowing your product.” (Italics added.)
To analyze engagement, ask three questions, continues Murphy:
- What does success mean to your customer?
- How does your product [or service] enable your customers to achieve that success?
- How does that change over the various stages of your customers’ lifetimes?
Choose your software
Next, choose the right software solution. Build your technology stack using a cloud-based phone-, email-, SMS-, and chat-enabled CRM application that dovetails with a sales enablement tool and predictive analytics software.
Based on the way you’ve segmented your customers and tracked their online and face-to-face behavioral data, use your chosen technology solution to right-feed them with the content they’re searching for, in the dose and rhythm that work best. This will ensure good CX over web, social, and mobile.
Identify your team
Finally, pick the ones who’ll get to be on board your team. Redpoint VC Tomasz Tunguz6 here recommends Rapid7’s Mike McKee’s template of a cross-functional team that spans marketing, sales, professional services, training, and support:
- Sales and pre-sales engineers, collaborating with account execs on the sales process and closing the sale
- Professional services team members providing customization and training for customers
- Training (or Learning & Development) and Support professionals, who offer ongoing help to customers on best practices and product/service knowledge
- Managers to nurture and expand the accounts
What’s the C in CLV, again?
When marketers commit to chasing CLV, customers willingly volunteer to double up as fellow ideators, evangelists, cost-savers, collaborators, beta testers, and advocates.
If there’s a better way to raise company lifetime value, we’re all ears.