Customer Lifetime Value (CLV) & Data-Driven Marketing

Loyal, high valued customers start their life off as solitary clicks on a dashboard; their value unknown and potential questionable. Some of these clicks will become super fans of your business, spending large sums on multiple occasions, whereas others will be lost to the ether, never to be seen again. It is your objective to turn as many of those clicks into customers by guiding them through your brand story, and leading them to purchase. And, ensuring that as many of those initial clicks have high potential to become repeat customers.

Every click is unique. Our goal is to track the most successful clicks that become profitable customers and get under their skin. It is to understand what drove them and what helped them along the way. We want to know their journey with your brand before and after purchasing. How many digital touch points did they go through? What touch points did your most profitable customers interact with? Planning your ideal customer journey is the start of measuring its success and adapting it to attract your best customers.

Knowing these motivations allows us to refine the story, and tailor it to our most successful customers; the ones who purchase more frequently and at a higher price. This helps us give these customers even more of a reason to come back by giving them a five star service every time. It also gives us the information to find more just like them.

Growth comes from a balance of acquiring customers and retaining them. The only way to do this successfully is with the right information on them, or data.

Customer Lifetime Value (CLV) & Customer Acquisition Cost (CAC)

Customer lifetime value (CLV) has become a bit of a buzzword. But it is so important to understand, not only to track marketing activity, but also because it directly correlates to business performance. The lifetime value of your customers is the value of your business. Put together with Customer Acquisition Cost (CAC), you have a simple but vital measure of business and marketing performance.

Concentrating on marketing activity, CLV has two main benefits. Firstly, you know the value of each customer to your business, which lets you optimise your paid media budget effectively by concentrating on high-performing channels (reducing CAC). It also enables you to segment your customers based on their lifetime value, resulting in targeted email campaigns that talk directly to each customer (increasing CLV).

The second advantage of knowing CLV is it lets you compare customers across different time-based cohorts, giving you the ability to compare the value of different customers accurately. This lets you value customers across other customer properties, such as the difference in value of male and females across your entire customer base. These insights can inspire marketing campaigns directly aimed at your most valuable customers.

Increasing your CLV and monitoring your CAC are two important long-term KPIs for sustainable growth and provide a strategic measure for your marketing activities.

Customer Lifetime Value (CLV)

There are many ways to calculate CLV depending on the business context. For e-commerce, where transactions are unpredictable and continuous, the calculation becomes more complex as you have to use probabilistic models or machine learning. The goal is to understand the lifetime (past and future) value of each customer, therefore we need to take into account the purchasing behaviour of a business's customer base historically and model future behaviour for each customer.

Knowing future purchasing behaviour is obviously useful for forecasting demand and business valuation. But for marketing, we need to compare customers acquired at different times, so we fix the time period of each customer to compare them accurately. For example, over a two year time period, some value will be attributed from revenue, and some from predicted revenue from our model.

This is because customers acquired two years ago will have had more time to purchase than a customer acquired three months ago, and are likely to be more valuable to the business at the present time (because they have had more time to purchase). Therefore, fixing the time period gives every customer the same lifecycle, giving a more accurate metric for comparison. This allows you to compare the value of customers against other metrics such as campaigns and demographics.

Customer Acquisition Cost (CAC)

Calculating CAC is a little more straightforward, as you can take an average across a time period and divide by the number of customers. E-commerce companies can become obsessed with reducing CAC, but this is a red herring.

In our view, if a customer has the potential to be an extremely profitable customer (high CLV), you should be increasing your CAC to acquire these customers, not trying to reduce it. Increasing CLV along with a stable, or even rising, CAC is more profitable than a stable CLV and reducing CAC.

With this in mind, a good approach is to profile customers based on your existing data, segment them with CLV calculations and increase marketing spend when targeting customers with high CLV, whilst reducing budgets for other segments who may not be as profitable, or cutting them out completely.

Paid Media & Email

Paid traffic is one way to attract potential customers. But they must be profitable customers i.e. CLV > CAC. Paid media will be a significant contributor to your overall CAC and therefore needs to be optimised to ensure profitability. Sending the right message to the right customers is vital if you want to attract the right customers for the right price.

Email marketing plays a role in customer acquisition through nurturing leads but is also key to increasing CLV for existing customers. A tailored email campaign to customer segments is much more effective in encouraging repeat purchases than a scattergun approach to emailing a mailing list. Repeat purchases are the most effective way to increase customer lifetime value, because for most companies the majority of customers are one-time buyers.

One way to optimise your email campaigns is to calculate the probability that a customer will purchase again using a probabilistic model. Customers who have a probability of less than 50% of a repeat purchase can be segmented into a 'retain' segment and those with a probability of more than 50% can be segmented into a 'loyalty' segment. Then, campaigns and email flows can be created to directly talk to these two segments to encourage a repeat purchase. Customers who make one repeat purchase are much more likely to purchase a third time, so breaking down the one-buyer problem is a key growth target.

Customer Retention Platform

Paid media and email marketing are executed in different places, but for the same customers. Putting all this information together is key to getting a customer-centric view. A way to store all this information together is in a data warehouse. This gives you full ownership of the data, which you can analyse and act on. It is unique to your business, it is your competitive advantage.

A customer retention platform stores information about your customers so you can refine your audiences and messaging in paid media campaigns. They also allow you to personalise email content to encourage customers to purchase again.

Information can be stored from Google Ads, Meta Ads, Klaviyo & Mailchimp to build up a holistic view of each customer's activities across your acquisition and retention strategies. Combine this with first-party data from your CRM, GA4 and CLV predictions, and you can start to build a holistic view of your customers, laying the foundations to make data-driven marketing decisions.

Final thoughts

Traditional marketing metrics have their place in measuring campaign performance, but if you want to know whether your marketing activities are making a real difference to the growth of your business, then CLV and CAC should be front and centre. It is the key to sustainable growth and a profitable online customer acquisition and retention strategy.

Ready to transform your clicks into loyal customers? Contact us today for a chat on how we can help you grow your business. Whether you need assistance with paid media, email marketing, customer profiling or building a robust data warehouse, we’d be happy to discuss your goals and ambitions with you.