LTV There For The Taking. Why Aren't You Using It?
I recently learned of a brand that simply doesn’t believe in LTV. They only consider each individual transaction as the measure of their marketing efficacy. Despite knowing their customers’ shopping patterns, they are locked into a budgeting approach that is derived from a single retail transaction. As you can imagine, that results in an annual marketing playbook that looks exactly like the previous year. The outcome is predictable: flat annual growth, competitors grabbing massive amounts of share, and marketing teams complacently content to survive another year. The brand’s lack of consideration for their LTV is indicative of the organization’s acceptance of stagnant performance, despite the shifting world around them.
On the other hand, I’ve had the opportunity to work with brand partners who are wildly successful because they cater their efforts to the LTV-based segments, which represent their prospects for growth. An LTV-first approach impacts all facets of the organization. Product development and buyers’ decisions are focused on sourcing and innovating around what high-value customers are seeking. In turn, marketing eliminates waste by concentrating their working media dollars in places where high-value customers can be found. Agency partners are aligned as well; there’s no guesswork in curating creative that is highly targeted or setting campaign objectives and metrics of success. Not surprisingly, customers benefit from LTV-first brands because everything the brand does feels natural. This creates greater brand affinity and thus results in more visits, and ultimately an even higher LTV.
Sounds easy, right? But what if you haven’t determined your LTV? Measuring LTV starts with defining it. At its simplest, LTV is the amount of revenue contributed by a customer over the average period-of-time they are a customer. That said, there are additional data points to consider, such as: Net-Promoter Scores, social channel engagements, influence, components of time, and the length of time a customer will engage with your product or brand. Admittedly, the time component can be a tricky one. For example, the LTV for a Tide customer could be measured over several decades. The same goes for most consumer-packaged-goods where there’s an opportunity for high brand affinity, frequency of transaction and a life-long expectation of purchases. In those extreme cases,or even in less extreme cases, I suggest assigning a more manageable LTV that, while arbitrary, provides a baseline. Oftentimes, determining the time period is an analytics exercise. With air travel for example, we can analytically determine the average length of time a customer will use a particular airline. However, there will always be variables that cannot be pre-determined: a job change requiring more or less travel, a relocation away from family, or a family emergency requiring last-minute travel plans. The point is that although LTV is analytically derived, there will always be real-world variables introduced by the simple fact that humans are involved, and somewhat unpredictable. To solve for this, choose an arbitrary period, such as one year, five years, or a decade, and build around it.
When factoring in the financial side of LTV, you can either go straight to revenue or you can assign different weights for the non-financial activities that demonstrate affinity and likelihood to be more valuable. If you’re a manufacturer that is retooling a product with an exceptionally high LTV, you may want to focus on a slightly lower, but larger LTV audience, based on their likelihood to embrace a new product. Given all these variables, LTV can be complicated. Your organization must have an agreed-upon strategy that your entire team adopts.
Which categories of brands benefit from utilizing LTV? All of them. Even brands who can only expect a single transaction from a consumer should still have an LTV that drives their decisions. And the size of the brand doesn’t matter. A small handyman service should recognize that its most lucrative to find customers in affluent neighborhoods, because that’s where his or her LTV is highest.
This all sounds intuitive, but many brands overlook LTV as a critical metric in determining the efficacy of their marketing program, which is unfortunate given the tremendous benefits. The good news is that it’s never too late to quantify your customer LTV. To get started, agree on the metrics most relevant to your brand, overlay sales data to measure transaction frequency, and then share that information with your internal team, agency partners, and vendors to ensure complete alignment. Then sit back and enjoy the ability to build sales while accurately measuring the success of your marketing and growth efforts.
Sean Baker is president of IMM. This article was published by MediaPost and can be read here.