Developing customer lifetime value (LTV) enables brand leaders to create more effective marketing mixes and respond to shifting budgets, yet only 17 percent of chief marketing officers track their LTV well, according to the CMO Council’s latest report, ‘Humanizing + Analyzing Relationships to Drive Revenue, Retention and Returns,” conducted in partnership with Deloitte.
Based on responses from 150 CMOs, the findings highlight LTV blindspots and how marketers can redefine and track LTV to reflect the new digital realities.
For 44 percent of CMOs, the top reason they analyze LTV is strategic organizational focus on customer retention and value creation. LTV, also a key performance indicator of a brand’s ability to deliver great customer experiences, helps marketers justify spending on targeted campaigns.
More importantly, LTV is a reflection of a brand’s ability to create loyal customers, which drives profit. Data from a 2020 Deloitte report shows that 87 percent of consumers are loyal to their favorite brand for three or more years, with 61 percent making at least three purchases from the brand in the previous six months.
The advantage of LTV investment for a brand, however, goes beyond the marketing team. The CMO Council found that 53 percent of chief executive officers and 49 percent of heads of sales utilize LTV to inform strategic decisions.
Nevertheless, CMOs struggle with tracking LTV– 82 percent track LTV only moderately well or worse, and more than one out of four don’t track LTV well at all.
The revenue of a customer over the course of a lifetime should be three times the cost to acquire that customer. While this cost of acquisition (CAC) to LTV ratio is a good starting point for understanding LTV, 43 percent of leaders rated their ratio as average at best. Another 25 percent rated it as below average or very poor.
Sixty-six percent of marketers cited revenue per user as a core component for measuring LTV, followed by 45 percent for transaction per user and 26 percent for sessions per users.
For LTV to be effective, however, leaders must take into account a variety of factors, starting with customer segmentation to ensure they’re not wasting resources chasing the wrong customers. The reality is 84 percent of respondents agree they’re not effectively segmenting and targeting customer sets with the most potential for long-term value.
Rather than rely on traditional demographics, marketers are better off developing psychographics of their customers and track online and offline buying behavior. This approach may not benefit, say, a food and beverage company like PepsiCo, which targets customer “cohorts,” or people with a shared concern such as their health, but even in these cases segmenting is key.
“Our aspiration is to track the lifetime value at the consumer cohort level. We think a lot about penetration and the frequency of purchase of our products over a given time period—the dynamics of lifetime values,” says Ram Krishnan, global chief commercial officer at PepsiCo.
Another reason LTV suffers is a lack of clear ownership. When asked who owns this area of strategic growth, answers varied greatly: CMO (32 percent), chief revenue officer (16 percent), head of sales (14 percent), chief executive officer (nine percent) and line-of-business leader (eight percent). As the report notes, the correct answer needs to be making all of these leaders accountable for LTV.
“Building relationships is a marathon, and it takes forward-thinking leadership to look at LTV. Many companies are focused on the here and now, and this year they’re in triage mode. You have to remember that the average CEO tenure is five years. That’s why a lot of companies fall short with LTV,” says Brett Townsend, head of North America insights for Electrolux.
The top challenge for cultivating lasting relationships boil down to data, without which marketers can’t segment and target customers with the highest potential for net profit. Respondents’ primary areas of concern include aggregating data for a robust view of the customer (55 percent), shifting from assumptions to predictive knowledge of consumers’ needs (47 percent) and identifying the moments to provide delight and differentiation (44 percent).
The data-driven insights that CMOs seek most are: level of satisfaction (44 percent), LTV (41 percent), incident of churn and defection (37 percent), customer purchase history (35 percent) and brand loyalty (33 percent).
The good news is marketers know what steps they must take to convert customers—humanize connections, align the organization to fully deliver on the brand promise and offer products that meet well-defined needs.
LTV-boosting initiatives that CMOs currently find most effective include enhancing communication of product value proposition (47 percent), doing more sophisticated targeting (42 percent) and leveraging relevant marketing content (42 percent).
To maximize LTV, marketers must change their mindset from acquisition to retention, as well as pay close attention to channels where customers leave signals about their needs, such as email (73 percent), social media channels (54 percent) and web forms (54 percent). Consumers may provide the greatest amount of signals over email, but the most effective signals occur through service and support interactions.