The Return of Customer Lifetime Value

While the response tactics and ROI metrics of direct are in digital’s DNA, one measurement has been mostly overlooked: Customer lifetime value, or CLV. Now Google is bringing it back into the conversation.

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Digital marketing has become direct marketing, embracing many of the tactics that made old-fashioned direct mail successful. But while the response tactics and ROI metrics of direct are in digital’s DNA, one measurement has been mostly overlooked: Customer lifetime value, or CLV. Now Google is bringing it back into the conversation.

I think the reason digital has been slow to adopt lifetime value is its focus on immediate spend and response, opt-ins and ROI. For the most part, digital has developed in the direction of programmatic: Give me what I need right now as cheaply as possible. Long-term value in digital has been measured in email subscribers and SEO rankings. These are different ways to count anonymous traffic; they don’t recognize the individual customer, let alone value the relationship.

But even as digital is becoming more programmatic, it’s also maturing. And brands that built themselves on instant gratification are finding short-term thinking is a liability in the age of customer experience.

Google Approved

In this month’s “Think With Google,” Matt Lawson, director of marketing and performance ads at Google, told marketers “Don’t get left behind: Return on ad spend is out, Customer Lifetime Value is in.” The post opens with this statement:

“To charge ahead in today’s competitive marketplace, brands must think beyond short-term, transactional gains and look toward maximizing Customer Lifetime Value (CLV). While many marketers understand this shift needs to occur, some are grappling with how to get their organizations to focus on CLV and use it to advance goals.”

In it, Lawson interviews, George Popstefanov, founder and CEO of global advertising agency PMG, who says, “If you don’t have some type of lifetime value calculation, even at a broad level, it will soon be impossible to compete.”

They go into a case study of OpenTable: The online restaurant booking app that’s been around for a few year and is now turning to customer lifetime value to measure the value of the relationship with each customer beyond one-time bookings. And of course, by focusing on high-value customers, OpenTable saw the same kind of long-term boost in ROI that direct mailers saw decades ago when they discovered the same metrics.

Signs of Digital Maturity

The “Think With Google” article is a bit self-serving, since OpenTable used Google to figure these metrics. But I think the shift reveals some very interesting things about the state of digital marketing:

  • The low-hanging fruit is plucked. I couldn’t agree more with Lawson and Popstefanov that digital marketers need to include some kind of long-term valuation in order to continue to grow and compete. But I’m surprised it took this long to get there. The beginning phase of any direct marketing model looks like a gold rush with everyone panning for the easy nuggets. But once there are more pans in the river, there’s less to go around. Those miners who invest in deep mines are the ones who continue to cash in. Metrics like CLV are the deep mines for marketers.
  • Branding is back. Customers are tuning out digital marketing that doesn’t have some positive personal association, and that comes back to branding. Even in the conversion-focused, commoditized realm of digital marketing, your brand impression plays a big part in convincing customers to pay attention to your marketing and eventually buy. The more direct the environment becomes, the more a good brand becomes the deciding factor.
  • Google wants to own customer lifetime value, too. The very fact that Google, who’s essentially has been the USPS of digital marketing, is talking about the importance of lifetime value shows they don’t intend to be victimized by a shift how consumers shop online. As digital continues to mature as a marketing channel, look for Google, Amazon, etc., to try to be in position to capitalize on every change.

In digital marketing, what’s old really is new again.

Author: Thorin McGee

Thorin McGee is editor-in-chief and content director of Target Marketing and oversees editorial direction and product development for the magazine, website and other channels.

One thought on “The Return of Customer Lifetime Value”

  1. Thorin,

    I find it hard to believe that any direct marketer, digital or paper, doesn’t focus on the lifetime value of a customer. If they didn’t, CRM would be meaningless and we wouldn’t have to pay premiums on insurance policies over our own lifetimes.

    What is particularly interesting today is that marketers are so concerned that the concept of ‘membership’ or ‘subscription’ rubs against the grain of a commercially promiscuous generation that they are offering ‘open ended’ purchasing systems. But the principal reason they are doing this is because they are finding that the ROMI (Return on Marketing Investment) is often greater than the churn-discounted value of ‘subscriptions’.

    The metric to determine the likely LTV of a customer is simply the extension of the CPO. If it costs 10 to acquire the customer in the first place for a single sale of 50, all we need to do is measure the additional CRM or re-promotional cost to get the sum of the promotional spend. Then we determine from the customer’s additional purchases, the sum of revenue generation over a conservative time period and you have the ROMI based on the LTV. Not all will be equal but the establishment of a benchmark will inform further promotional spend.

    The determination of the ACPO, the allowable cost per order must be based not on the initial order but on a careful estimate of the LTV.

    Anyone wishing to have a simple ACPO template need only ask me for one. email: pjrosenwald@gmail.com and say ‘ACPO, Please’.

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