How to measure customer lifetime value as part of ROI

David Ellis

8 min read

The great thing about the recent evolution of the customer journey analytics landscape is the increased focus on long-term value.  Because tools enable you to focus more on measuring the whole customer journey, including non-transactional elements, you can understand how engagement drives loyalty and ultimately value, both to the customer, and to the business.  It means you can link “non-transactional” activities on your app, for instance, – such as logins, my account interactions, or – to a longer-term value.

Clearly, this is very important and valuable, as it moves the business away from focusing solely on customer acquisition, which is still important of course, but is more expensive generally than keeping existing customers.  Customer journey analytics also enables the business to use first-party data a lot more, and so moves away from a dependence on third party marketing data.  But fundamentally, it’s about a philosophy of taking a longer-term view, and delivering customer lifetime value as a key part of any ROI for your digital activities.

However, at a practical level, this comes with some challenges.  With short-term metrics, like acquisition, it’s a lot easier to link your activities to the defined benefit – did the customer buy the product, or subscribe, or whatever it might be.  But this has no consideration as to whether that customer will hang around in the future – they could be a bargain hunter, and so only look for discounts, in which case they are actually a negative impact on the overall business.  

The problem with a longer-term view is that you can’t show the value so easily.  

Either have to wait longer to really understand the impact of your marketing activities, or you need a series of proxy metrics which you have otherwise demonstrated are part of the journey to lifetime value, or you need an insight programme, or a predictive model, to show that value.  And so, often, businesses give up on such metrics, and such programmes, and end up focusing on short-term value again. 

So, how can you break out of this “vicious cycle” of only focusing on the short-term impact, and look to long-term value?  Here are some tips.

1. Use customer lifetime value as your North Star metric. This is the metric that should guide all of your decision-making, from product development to marketing campaigns. By orienting your entire company around this metric, you’ll be able to make sure that everyone is working towards the same goal.
2. Ensure commitment to this approach comes from the top.  Especially in the current economic climate, there will be a temptation to focus on short-term value.  But this is actually misguided.  In a downturn, the best approach is to focus on your most valuable, long-term customers, as they are the ones that will help you through, and they are also the ones that will most value what you do for them.  But understanding this takes a long-term vision and a commitment to these long-term value drivers.
3. Make sure you have a clear understanding of your customer journey. This will help you identify which activities are most likely to generate long-term value. Once you have this understanding, you can start to focus on these activities and invest more resources in them.
4. Use predictive modelling to estimate the future value of your customers. This will help you understand which customers are most valuable and how to best allocate your resources.
5. Use customer surveys to constantly check in on customer satisfaction levels. This will help you identify any potential problems early on and take steps to prevent them from becoming bigger issues.
6. Use cohort analysis to track groups of customers over time. This will help you see how different groups of customers interact with your product or service and identify any trends. 
7. To start off with, link your activities to customer behaviour, not just transactions. If you can show that your app or your website is being used more, or that engagement is increasing, then this is a valuable metric in its own right. It doesn’t necessarily have to be linked to immediate revenue, but it’s a valuable marker of progress.  And you can also then evolve your activities and insights as you develop your programme.

Customer lifetime value is a difficult metric to focus on, but it’s one that is becoming increasingly important. By orienting your company around this metric, you can make sure that everyone is working towards the same goal. And by using the right tools and techniques, you can start to focus on the activities that generate long-term value.

Read more about how this worked in practice for one of our clients.

Or feel free to contact David to discuss this further.