Customer Lifetime Value: the what, when and why of lifetime value modelling.

Andy Kilbane outlines the importance of the lifetime value modelling metric.

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I’m sick of 2020. I was going to start this blog with a summary of the year but, to be honest, I’m just looking forward to it being over and hoping that next year doesn’t throw us as many curve balls. But, without dwelling on it, there is no doubt that 2020 has changed things and we are only beginning to feel the impact of a seismic twelve months. And, there is more to come with Brexit on the horizon and the downstream effects on businesses as government support trails off.

From a marketer’s perspective, there will inevitably be increased pressure to ensure that campaigns are delivering value – a challenging task in a fluid environment where budgets are under increased scrutiny.

Lifetime value modelling offers a solution, allowing you the capacity to decide where you should invest marketing budget (and where the wider business should invest) and where there are both risks and opportunities across the customer base. For example, some of your customers may be spending a lot with you this year but then are likely to spend very little with you for the next 3 years, versus a customer who is spending a moderate amount with you this year and will continue to spend that same amount with you over the coming 3 years. Customers come in all shapes and sizes, and so does their spend...

So, let's get to know lifetime value modelling better by exploring the component parts of this data science tool, as executed by Realise Unlimited:

- Future value: rather than solely looking at what a customer has spent with you in the past, lifetime value modelling looks at what they are likely to spend with you in the future. This is a critical feature as it means that marketers can focus their investment on the customers that are most likely to have a higher value with your business over the next few years.

- Customer profitability: rather than just looking at what a customer spends with you, it is very important to understand what it costs you as a business to have that customer, and therefore most lifetime value models look at profit - this is ultimately how a business will be judged in terms of success or failure. This enables businesses to make different decisions about their customers rather than using spend alone.
- Flexible horizon: lifetime value is something of a misnomer – rather than looking at a customer’s lifetime with a brand, it is more likely that you will decide to look at their value with you over the next 1/3/5 years because this will align more strongly with your strategy and be more accurate than trying to predict for a lifetime in which a large numbers of different factors could impact their relationship with you. 2020 has proven that anything can happen, but it's not always a pandemic that shifts consumer behaviour. Big changes like a new arrival in the family or poor customer service on a memorable occasion can impact your relationship with a customer. If you have a marketing plan for the next 3 years, for example, your future value period can be aligned to the same duration to ensure you are only accounting for value in the planned period.

- Business aligned: solutions can also be aligned to different business models and this is an important consideration in lifetime value modelling. A subscription business (such as a mobile contract) is very different to a high frequency retailer (e.g. a supermarket) which is different again to a high value/low frequency business (holidays for example) – there are different solutions that allow for different scenarios and even combinations of revenue types, so it's important to tailor your metrics accordingly.

Realise Unlimited incorporates a robust framework as standard with any lifetime value modelling program, to ensure you measure changes in customer profitability.

By demonstrating the impact of decisions on customer profitability, businesses are better able to justify investment and monitor impact. Lifetime value modelling has been praised by Forbes, MarketingWeek and Entrepreneur. But, in our experience, very few brands can ever tackle calculating this complex measurement on their own with enough accuracy for it to be truly valuable.

If you want to know more about lifetime value modelling, then I suggest signing up for Stephen Welch’s webinar on the 24th November to hear more. Or, reach out directly. Hopefully this short blog has whetted your appetite to learn more – and hopefully I’ll see you there.