Using Customer Lifetime Value to Optimize Marketing Impact

Marketers can uncover valuable ammunition for their initiatives by calculating customer lifetime value (LTV). According to an Entrepreneur article, LTV is important because it gives you an idea of how much repeat business you can expect from a particular customer. The following equation (also provided by Entrepreneur) provides a simple approach to determining LTV:

 

(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)

 

Depending on the complexity of your business, securing the numbers to plug into the above equation may require cross-functional collaboration within your organization – whether it’s with finance, operations, sales, or another group. But the time will be worth the effort. The Entrepreneur articles goes on to say that once you know how frequently a customer buys and how much he or she spends, you’ll have a better grasp of how to allocate resources to customer retention programs and any other services you’ll need “to keep your customers -- and keep them happy.”

 

And with LTV scores in hand, you’ll also know who your most profitable and loyal customers are, and you can then focus on doing what it takes to keep them coming back for more.

 

Zeroing in on Your Top Prospects Using Channel Attribution

When it comes to finding new customers, businesses can also be more precise and targeted about their efforts. I recently came across an insightful podcast by Steven Bellach of Bottom Line Marketing that addressed some interesting points about channel attribution (determining the marketing mediums that deliver the most leads). When working for a leading nationwide florist, Steven discovered that customers gained through radio advertising were more valuable to his company and provided higher LTV than customers obtained through ads placed on Yahoo. (As it turned out, the Yahoo prospects were more interested in finding a quick, cheap deal.) This data enabled him to more effectively segment his marketing budget to reach more profitable customers.

 

Marketing channel attribution can be complex to calculate and identify, as many purchasers these days typically engage with multiple brand touchpoints, such as email campaigns, website, social media, ads, articles, videos, etc. However, for tracking purposes, Steven says companies can use the last marketing medium engaged, known as “last click.” In addition, he says that LTV combined with customer acquisition costs and lead-to-sale conversion rates provides marketers a cost per lead, which helps organizations align budgets with the most optimum lead generation activities and best marketing channels.

 

Although last click is a simple way to track lead sources, in my experience, more companies today are finding weighted attribution to be a better, more meaningful approach. The concept here is that not all marketing touchpoints are created equal; a prospect visiting your trade show booth or store location would obviously be more valuable than if she merely clicked on your online ad. Similar to the idea of lead scoring, weighted attribution allows a business to assign values to their marketing channels to better determine their most valuable lead sources. Artificial intelligence may even be used to help assign these values in the near future.

 

The Power of Email

Of course, when it comes to attribution and the most cost-effective marketing channels for lead generation, email continues to rank at the top. In addition to helping drive customer growth, email is ideal for maximizing LTV. It supports building long-term customer relationships, establishing loyalty with your brand, nurturing cross- and up-sell opportunities, offering incentives and gifts as rewards for loyal customers, and enabling and delivering superior customer service. (See my recent blog post for details on how email can maximize LTV.)

 

Let’s face it, data is knowledge, and for anyone looking to step up their marketing game this year, I highly recommend finding a way to track powerful business metrics such as LTV and channel attribution. The more you know about your customers, the more successful you’ll be in finding new ones – and keeping them for the long term.

 

Outward Media’s accurate, targeted email data can help you achieve better email marketing ROI by targeting your best prospects and, ultimately, converting more prospects into customers. Take a look at our case studies to find out more.