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Has ROI Outlived its Usefulness? Time to Measure Customer Lifetime Value

Has ROI Outlived its Usefulness? Time to Measure Customer Lifetime Value

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Savvy retailers and marketers are turning towards customer lifetime value (CLV) as an alternative metric. Calculated by assessing how much value a shopper brings to a brand throughout all of their interactions against how much has been spent in terms of marketing, it helps to create much more effective e-commerce marketing.

Marketers are keenly aware that acquiring a customer is more expensive than retaining one. However, they struggle to apply this maxim to existing customer strategies. This is borne from the fact that marketers are inherently focused on return on investment (ROI). They see customer interactions through the prism of whether a sale matches the spending that secured it. 

That said, quite a few marketers are losing faith in ROI as an effective metric. What is needed is a broader metric. On that comprises short-term customer purchases and the value transacted to create them over time. Optimising for loyalty is often a common topic for marketers. But fitting loyalty into the conventional sales formula is challenging.  Moreover, the term loyalty is itself rather deceptive. If a shopper completes two low-value purchases, or only buys discounted goods, are they considered a valuable patron? 

A more valuable metric could be customer retention. After all, this is all about encouraging customers to keep doing business with you, more often and in bigger volumes. A more sophisticated measure is needed to optimise for retention than ROI. Retention needs a dynamic metric that can work out the complete value a customer brings to a brand over their lifetime - Customer Lifetime Value (CLV). CLV amalgamates customer data by gauging the entire customer journey. The data harvested by CLV can be used to develop strategies for personalised customer engagement.

CLV has the potential to become the main marketing metric of the future. By relying on CLV resources can be allocated more intelligently and more invested in higher-value customers – who warrant that investment. Optimising investment in this way means a business is better positioned to improve profitability and enjoy higher growth.  

CLV: New challenges for an established metric

CLV is not a new measurement. In fact, it’s history can be followed back for several years. With this heritage, aren’t all organisations using CLV to fine-tune their programmes? To understand why we surveyed marketers and business leaders over the course of 2018 and this year around how much CLV has been integrated into marketing; and how the measurement has developed. 

Overall awareness of CLV has remained even over the last several years but experienced a spike in those who expressed having a high awareness (43% in 2019 vs 34% in 2018) and also in efforts to monitor CLV (32% vs 24%). We identified a positive level of agreement on the benefits that CLV can drive, including around customer retention, sales and brand loyalty. However, respondents to the survey also expressed some thought-provoking insights around the challenges organisations need to face in order to operationalise CLV. 

The research uncovered three major gaps that need to be considered: 

Gaps in the business

The business gap links to CLV strategies being siloed and is reflected in a failure to get the buy-in of every stakeholder for the measure. Over half (55%) felt their organisation had a thorough understanding of CLV, according to the 2019 survey. However, there was a marked 50:50 split between respondents who regarded CLV as a high business priority and those that considered it was unlikely to develop into a priority over the coming 12 months. Two-thirds of respondents stated that their organisation could have improved the way it monitored CLV. Specific business challenges that were highlighted included an unsophisticated strategy (20%), lack of buy-in from the senior team (20%) and silos within the organisation (17%). The results of the survey underline the need to get that all valuable buy-in from senior executives and departmental heads if CLV is to be embraced at a company-wide level. 

Gaps in the data 

The data gap comprises issues around locating and leveraging the data required to develop a holistic picture of CLV. Our research indicates that UK marketers are most sophisticated in the way they use data. However, it is found that there were some considerable barriers to drawing the total value from customer interactions and behavioural habits. Key data challenges comprised tracking customers across devices (30%), an inability to harvest data because users were not signed in (23%) and being unable to track single-use products (21%). 

Gaps around skills

The skills gap speaks to the challenge in retaining the required in-house talent or engaging the external support, necessary to operationalise CLV. Our research found that skills in this area are a common problem for businesses. Lacking the in-house skills to monitor CLV was a problem for 40% of businesses, while 27% said it was too complicated to monitor and 18% were unable to implement any learnings from their CLV monitoring. A dearth of talent is a huge problem for almost all industries but is particularly prominent in businesses of over 500 employees or more. With huge demands on data, these types of organisations are usually entrusting some of the decisions in this area to staff members with insufficient levels of experience, which hinders the entire CLV monitoring endeavour.  

Filling the gaps

It is going to be a long-term endeavour to tackle to address these three areas. It will need marketers, senior decisions makers and the heads of department to collaborate in order to enhance organisational awareness and establish CLV as an actionable way to monitor and improve relationships with existing customers and prospects. This demands that they rise above the short-termism and broad-brush strokes of ROI and instead consider the longer-term prospects of each of their customers. In our latest report, Is ROI dead? The state of Customer Lifetime Value 2019, we investigate these gaps in much greater depth and provide extensive recommendations around how a business can start to tackle them within its organisation. 

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Elizabeth Brennan

Elizabeth Brennan

    Elizabeth Brennan is Commercial Director, UK, at Criteo, the advertising platform for the open Internet. With nearly a decade of experience in digital advertising, Elizabeth worked initially in paid search before moving into planning and account management.

    She is a champion of women in business and a strong believer in the power of mentoring. A graduate of The University of Reading, Elizabeth is a former winner of the prestigious NABS Fast Forward award and has gone on to achieve Code First certification as part of the organisation’s initiative to increase the number of women in tech.

    Read more from Elizabeth

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