With a focus on e-commerce and online startups, this series of article will cover the topic of Customer Lifetime Value, one that has proven a growing importance worldwide among marketers, entrepreneurs and data-scientists.
CLV is a prediction of all the value a business (being it a startup or a large corporate or even B2B) will derive from their entire relationship with a customer. It is often referred to in monetary value (for convention we will use USD here) and it is based on the present value of the projected future cash flows from a given customer (or a segment of customers database). CLV estimates are based on time-period, hence the need to relate each of them to the respective periodic value (i.e. we will focus more on 12months or 18months CLVs to be in line with ecommerce best practice).
Key concept not only in terms of Online Marketing strategy (think about setting up a cap on spending to acquire x amount of new customers and they valuable insights a CLV predictive model can provide), but also in terms of Business Planning (for instance, to prepare for expansion and achieve profitability in a shorter amount of time thanks to right assessment of value of each customers depending on socio-demographic or shopping behavioural features).
So, how to identify and evaluate contribution to the business of the “All-stars” customers? According to Pareto Principle, for many events and businesses approx. 80% of your profit can be attributed to 20% of your customers. Even if this statement may sound somehow extreme, it is actually common evidence (especially in traditional retail ecommerce) that some customers are worth a whole lot more than others and leveraging on them is the key to success.
CLV estimates, very forward looking, are based on predictive analytics techniques, ranging from very plain vanilla type of formulas to sophisticated statistical models. We will cover them in more details in upcoming articles; however the main takeaway from this reading is that CLV framework will enable you to turn a constrained optimization problem for acquisition spending from a MIN(cost) to a MAX(value) one.
Finally, please note that advantages of CLV are strictly related to its correct application to impact business fundamentals with particular regard of:
- optimal allocation of limited resources for marketing campaigns
- customer loyalty monitoring
- estimating value of existing customers as Assets in balance sheet
- cohorts analysis and repurchase rates
- impact of Analytical CRM methods to improve reactivation of customers
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