Editor's Note: Enjoy this blog from the Custora archive, acquired by Amperity in November 2019.
What’s the most important metric for your customer KPIs? If your answer isn’t Customer Lifetime Value (CLV) then we’ve got some perspective you’ll find valuable -- and if you are already thinking about CLV, we’ve got some ideas about how you could make it pay off even more.
If you are a current customer or if you’ve just read or heard anything from us beyond this single blog post, you know that one of our founding convictions is that Customer Lifetime Value is the one metric to rule them all.
We’re not the only ones who think this. We talk to C-suites all the time who are fully convinced of this idea. CLV is the bedrock of all customer-centric retail, and as we dive into a range of retail marketing KPIs — Acquisition KPIs, Segment KPIs, and Lifecycle KPIs — we’ll continue to be pulled into the orbit of the all-knowing, all-wise CLV.
Despite our deep and abiding loyalty to and love for CLV, we still, to this day, sometimes hear marketing leaders say, “Lifetime value? That’s something that Netflix or some other subscription service cares about. It doesn’t matter to my retail brand.”
And to that we say… a lot of things.
Every retailer has customers who are one-time buyers, and they don’t like them as much as the customers who buy three things or ten things. The economics are better with loyal, repeat buyers.
Customer Lifetime Value (CLV) represents the total amount that a customer spends from the first time they make a purchase with you all the way to when, unfortunately, they might turn away and never purchase from you again. Some customers buy a lot in that time; some customers buy very little.
It is very common for us to see this kind of balance, where a brand’s top 10% of customers drive half of the revenue. We've seen concentrations even crazier than this. Recently I saw a brand where the top 10% of customers drive 78% of revenue.
These customers are great to have on board. And just think about how much more revenue you could generate if you could find more customers who spend like that top 10%.
But also think about how devastating to your business it would be if you started losing those high-CLV customers faster than usual.
Very often the viability of an entire business depends on a relatively slim portion of customers. This fact is a good starting point when talking about why customer-centric KPIs matter.
If the majority of your revenue is coming from a small pocket of customers, there must be some interesting product and channel insights there. There must be clues as to how to acquire more similar customers.
Clearly, that would be a really cool lever: imagine you could snap your fingers and instead of 10%, you have 11% of extra-high-value shoppers like that. Then you’ve increased your revenue by 5%, which I think everyone would agree is a big deal.
CLV matters a lot.
Retailers are starting to realize that if they’re only looking at channel revenue or product SKU year-over-year revenue or same-store-sale year-over-year revenue, they’re ignoring this huge economic driver, because great customers are the lifeblood of great businesses.
So how do you get there? That’s why we’re here — to talk about the KPIs to track and improve upon to move the needle on that North Star metric, CLV. The point of KPIs is to analyze and optimize for the right metrics. A KPI should represent your progress toward an initiative that’s going to drive a lot of value.
If you say, “We’re going to allocate more money to attract more high-value customers,” you better have some KPIs in place to hold that initiative accountable, and return on ad spend (ROAS) is not the metric that’s going to get you there because it only accounts for the first purchase. Thinking about customer-centric KPIs requires that you re-center your approach around CLV and the metrics that directly impact CLV.
Your first step in increasing the number of your high-CLV customers might be acquiring new customers. Our next blog post is going to talk about the CLV:CAC ratio, which helps you prioritize ad spend for long-term gains rather than focusing on the short-term, as measured by return on ad spend (ROAS).
Another way you can go about increasing the lifetime value of your customers is focus on driving the value on a segment-per-segment basis, so we’re going to talk about tracking discount sensitivity, purchase frequency, and average order value (AOV).
The third way to increase customer lifetime value is to actually increase the length of the customer lifecycle, which means tracking when purchase frequency wanes to try to stop churn before it happens.
Check out other blogs that illuminate what KPIs to track along each stage of the customer lifecycle so you can increase CLV and thus systematically increase revenue. These metrics are the levers you pull to grow your business.
You can also learn more about the absolute most important customer-centric KPI (spoiler alert: it's CLV) in our whitepaper, Predicting Customer Lifetime Value with Unified Data.