How Focusing On Customer Lifetime Value Can Drive Growth

customer lifetime value

You can blow a lot of cash finding and keeping the customers you need to gain traction. Why are some retail firms kicking butt while others lick their balance-sheet wounds and liquidate assets? How do fast-growing companies get an edge over their competition? One way is by reframing their approach from product- and brand-centric marketing to customer-centric marketing using their digital data.

Rather than invest in scattershot and generic marketing campaigns, companies are building equity by identifying their best customers, and focusing on customer lifetime value (CLV). Early stage companies that understand CLV are finding more opportunities for investment – today’s VCs want to know exactly where growth will come from before they buy in.

Think this is just fad? An article in Harvard Business Review reports investors are putting increasing emphasis on customer equity compared with brand equity. Peter Fader, Professor of Marketing at the Wharton School of the University of Pennsylvania, says that companies are leaving a lot of money on the table with traditional one-size-fits-all marketing that pushes product and transactions. With the volumes of customer data available, it’s easier than ever to understand who the most valuable customers really are.

“We started looking at patterns in company data, and we had some stunning observations. If you look at customers in aggregate, then you market to stereotypical ways customers behave,” says Fader. “But when you respect the heterogeneity across customers, you can create new opportunities to create value for them – and for your shareholders as well.”

eCommerce companies need to make the shift from product-centric to customer-centric companies because, as Jaime Colmenares, eBay’s Director of America’s Customer Strategy and Analytics, says “Companies can analyze data to understand the differences between their most and least valuable customers. Many eCommerce companies have an implicit assumption that all customers are worth roughly the same. But there actually is tremendous heterogeneity. Adopting that type of thinking can have significant implications for how organizations operate and run. A customer-centric approach means that companies spend their resources creating extra value for the customers who can deliver the highest ROI.”

“With the volumes of customer data available, it’s easier than ever to understand who the most valuable customers really are.”

One company adopting a customer-centric approach is Nike, which recently acquired Zodiac Metrics, a consumer data analytics firm. Nike knows that the key to winning the sneaker wars lies in using its data to build one-to-one relationships with consumers – a key driver behind its acquisition.

This switch is not only for large companies – smaller companies can use CLV marketing to their advantage. Growth stage investment firm Provenance now evaluates investments based on this data – and companies are enthusiastically embracing a more granular view of their customers.  “Entrepreneurs and CEOs are always a little surprised and sometimes scared when they see that a fraction of their customers are generating the majority of the value at the company,” says Anthony Choe, founder of Provenance. “The key is to embrace this, and know who your key customers are.  Traditional metrics and KPIs that focus on overall averages don’t tell you this. There is no such thing as an ‘average customer.’ When we evaluate customer data and measure CLV, we focus on a brand’s universe of potential high-value buyers and project appropriate growth rates from there. Arbitrary growth targets derived from an assumed total addressable market penetration are misleading at best, and potentially dangerous as a strategy at worst.”

Early stage companies have an advantage in getting started with CLV marketing as they don’t have to overcome ingrained processes or sort out reams of dirty data. But that doesn’t mean that large companies can’t make it happen. Financial firm Banorte hired Jose Murillo as Chief Analytics Officer. “My charter was to increase customer equity – to translate information into profit,” says Murillo. “Within three years, we were able to leapfrog our international competitors to become the second largest financial group measured by net income generation.”

The stats are impressive: After a little more than three years, his analytics group has in partnership with the business and support lines produced value close to $1B in net income. The value created solely in 2017 is equivalent to 43% of the total net income generated by the financial group. Banorte also blew its competitors out of the water with return on equity at 20%. Moving to customer-centric marketing generated 200x on their analytics investment for Banorte.

Too many companies are getting blindsided by fast-moving competitors that have gotten religion on customer centricity. If your company is struggling to find its groove, or finding that traditional methods no longer work, you are not alone. It’s time to wrap your head around CLV marketing.

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