No matter the company or the industry, the basic building blocks of business remain the same — customers need to spend more money with you than you spend on them. Couple this with the fact that there are some customers in your customer base who spend a lot more money with your business than the majority of your customers, and you might start to realize why Customer Lifetime Value should be the Northstar metric for all retail organizations.
When you optimize around product or channel metrics without regard to the customers who are behind the product or channel performance, you’re pretending that all customers are equal. CLV puts those siloed metrics in the context of value created, not just clicks, likes or opens.
Follow the 80/20 Rule
The Pareto Principle tells us that 80 percent of sales come from just 20 percent of customers, which means it’s important you do your homework and figure out exactly where that high-spending 20 percent is coming from. What’s their story? Which products are they buying?
In the broadest terms, CLV is a measure of an individual’s total spending over their entire relationship with a brand. Some of your customers will make large-basket-size purchases at regular intervals while others will make just a single small-ticket purchase. The first group of customers is far more valuable.
Delving into customer-journey specifics for those high-ROI top shoppers can inform strategy and help you be more strategic in your acquisition efforts.
To better understand this principle, let’s talk about the opposite end of the spectrum: your one-time buyers and high-discount shoppers.
A new customer acquired through Groupon converted at an 80 percent discount, gladly accepting your negative-margin product. These buyers are unlikely to return for a full-priced purchase, so while it looks like you’ve just acquired a boatload of new customers, the truth is that you merely gave away product to shoppers who more or less immediately churn as far as your customer life-cycle map is concerned.
Those high-value customers are different. They buy often, and often at full price. They see the value in your brand, and in turn, deliver value to your brand. These are the customers to focus your organization around serving. You’re better off acquiring one high-value customer than you are acquiring 10 or 20 (or more) low-value customers.
I’ve got one scary word for you: Blockbuster.
It’s a cliched example by now, and a familiar scare tactic to invoke the demise of Blockbuster at the hands of Netflix. But it demonstrates exactly why focusing on customer lifetime value is an urgent call to arms across retail.
Just 10 or 20 years ago, retail businesses had certain advantages by just existing. Certain points of friction enforced customer loyalty by default.
Before smartphones, it was hard for anyone except the savviest shopper to find much price transparency on your offerings versus your competitors’. I couldn’t be in your store, looking at your shirts and magically know what 10 other comparable shirts cost and what thousands of people had to say regarding recommendations and reviews. Now I can.
Before the rise in e-commerce and the Amazon-defined age of online customer service, I might buy your shirt simply because I didn’t want to get in my car and drive to the store selling the shirt I’d rather buy. (I’m that lazy when it comes to shirts.) That friction doesn’t exist anymore — I can probably get that shirt shipped to my door within a day, if not a matter of hours.
In a world like this, you can’t compete on price, and it’s no longer enough to win based on the location of your retail stores or superior distribution.
For those reasons, the brands that are well-positioned to win are the ones who deeply understand their customers and are optimizing their operations around nurturing and retaining their best ones. It’s the relatively small but devoted portion of customers who contribute an outsized portion of your bottom line.
Aligning your organization on the wants and needs of your most valuable customers is the only viable strategy for long-term growth in retail.
Identify Your Biggest Business Challenge and Strategize in the Context of CLV
Starting with CLV, you can begin formulating a plan to tackle almost any customer-related business challenge. Retail marketing has four major functions with regard to influencing customer behavior within the context of the customer life cycle:
- acquire new high-value customers;
- convert one- or two-time buyers to higher-value customers;
- increase the purchase frequency and/or basket size of current high-value customers, and
- prevent fading and attrition of your highest-value customers.
For some retailers looking at their CLV reports, they might notice that their drop in revenue was directly caused by churning high-value customers. Another retailer might find that they have a problem converting one-time buyers to repeat shoppers.
Maybe you have growth challenges in your acquisition efforts. It’s easy to simply unload a blanket promo or throw more money at the channel of your choice. But it’s not cost-effective and it’s certainly not sustainable because the customers you attract have to spend substantially more than you spend attracting them if you want to keep your business going.
But if you know who your highest-value customers are, the data will tell you what channels they came to your through, what products they purchased first, what products they buy most commonly, and tons of other interesting things that you can use to not merely more customers, but more great customers.
One of the best ways to increase CLV is to give customers a reason to stick with you. This could mean providing a rewards program, VIP perk, or sales targeted to repeat buyers.
Remember the 80/20 rule: Once someone is in your 20 percent, you want to give them every reason to stay. When looking at your customer data, don’t take trends for granted. You have the control to shape your business to meet your customers’ needs and the flexibility to respond to data as it comes.
As an entrepreneur, you want to maximize returns, and one way to do that is through calculating and implementing customer lifetime value with your first-party data. The numbers are important, but your application of them should always be focused on that one goal.
In the world of data analytics, the past 20 years have been very focused on the performance of specific marketing channels. Instead of getting bogged down by a smaller metric, realize that these are all parts of a larger whole building toward your business’s success. That success doesn’t come without customers, which is why CLV should be your guide.
Corey Pierson is chief executive officer of Custora.